Performance Food Group Company (NYSE:PFGC) Q1 2024 Earnings Call Transcript

Performance Food Group Company (NYSE:PFGC) Q1 2024 Earnings Call Transcript November 8, 2023

Performance Food Group Company beats earnings expectations. Reported EPS is $1.15, expectations were $1.11.

Operator: Good day and welcome to PFG’s Fiscal Year Q1 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Bill Marshall, Vice President, Investor Relations for PFG. Please go ahead, sir.

William Marshall: Thank you and good morning. We’re here with George Holm, PFG’s CEO; and Patrick Hatcher, PFG’s CFO. We issued a press release this morning regarding our 2024 fiscal first quarter results, which can be found in the Investor Relations section of our website at pfgc.com. During our call today, unless otherwise stated, we’re comparing results to the result in the same period in fiscal 2023. The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found in the back of the earnings release. As a reminder, in the fiscal first quarter of 2023, we updated our segment reporting metrics to adjusted EBITDA from the prior EBITDA metric.

Our remarks on this call and in the earnings release contain forward-looking statements and projections of future results. Please review the cautionary forward-looking statements section in today’s earnings release and our SEC filings for various factors that could cause our actual results to differ materially from our forward-looking statements and projections. Now, I’d like to turn the call over to George.

George Holm: Thanks Bill. Good morning, everyone, and thank you for joining our call today. I’m pleased to share our strong first quarter fiscal 2024 results with you today, highlighting our business momentum, which continues despite a range of macroeconomic factors. As you saw in our release this morning, our top line performance was just below the top end of the guidance range we laid out in August, and our adjusted EBITDA was above the top end of our guidance range. Our results show our company’s ability to perform at a high-level through a range of economic scenarios, and we expect this to continue going forward. Once again, we are very pleased with our independent restaurant case growth, which was 7.6% in the quarter as we continue to add new accounts and grow our share in this important channel.

We recognize that economic backdrop is a dominant factor in the investment decisions that each of you make on a daily basis. In a moment, I will address a few of these items and share our view on the current state of the foodservice distribution industry. But first, I want to discuss PFG’s strategic focus and reasons that we believe our company will thrive in the years ahead. PFG has evolved significantly since we went public in 2015. We have added new lines of business, broadened our end market channels and added products and services to capture market share in the large food-away-from-home industry. This shift has been deliberate, and we believe it positions PFG to grow both our top and bottom line for years to come. Our Foodservice business has built scale and breadth in an effort to elevate our independent restaurant sales.

We have and continue to invest our Salesforce and build new capacity to allow for a long-term market share gains, which has proven to be a winning strategy. In a moment, Patrick will provide more details on our strong results in the independent restaurant business. Vistar has adapted with the market and continue to reinvent itself. From an organization that largely served the vending machine industry, Vistar now sells a wide range of unique products servicing more than 10 distinct channels. These products range from the traditional candy snacks and beverages that Vistar has always sold and have expanded to include healthy alternatives like protein bars and prepared food, as well as health and beauty aids, non-food packaging and impulse purchases, and a range of beverage options.

The expansion of Vistar’s product offerings has allowed for a significant increase in channel distribution opportunities. We are particularly excited about the opportunity we see in the micro market area, which has been growing substantially. The micro market concept allows for a wide range of product offerings and is benefiting from a structural market shift towards this retail format. We believe Vistar is well-positioned to fully capitalize on this opportunity. Fulfillment is another area where we see significant growth potential. We have invested in facilities that are equipped with automation that allows us to efficiently ship small parcels directly to customers and consumers. For suppliers, this is a beneficial partnership, allowing Vistar to manage the last mile distribution of a range of products.

We believe this is an opportunity with significant runway for growth for Vistar. All our facilities servicing this market are currently operating at margins above Vistar’s average. The ability to produce above average margins is driven in part by a portion of the business that is priced on a fee basis. With many of the supplier partners, we do not take financial ownership of the product producing very high EBITDA margins. Over time, we expect scale efficiencies to improve these margins further. We have a plan to expand our capacity into additional sites that will allow us to achieve one day shipments to most of the continental United States. Finally, we are extremely excited about the opportunity that Core-Mark has brought to PFG. The Convenience store landscape is undergoing a shift away from traditional tobacco products towards more options in food and beverages.

Our broad expertise in food, foodservice and immediate consumption is combined with Core-Mark’s knowledge and relationship with the Convenience industry. This partnership with spans all of PFGs operating segments is expected to provide a long period of market share gains with both top and bottom line growth. The Convenience backdrop has been somewhat softer over the past few quarters. Still, we are very pleased with the adjusted EBITDA results Core-Mark has achieved and importantly, Core-Mark’s top line performance has exceeded the industry growth rate in many key categories, including significant outperformance in the foodservice and snack categories. The pipeline of new business opportunities remain significant, and we expect to add new customer accounts at a steady rate over many years.

Historically, PFG is a company that has not only been resilient in difficult times, but has improved during periods of stress. The pandemic was a clear example of this, during which time we gain more market share than we typically would over a multi-year period. While we would all prefer a smooth operating environment, we do not shy away from moments of volatility. Rather, we view it as an opportunity to get stronger, solidify our position as a market leader, and propel our business to new heights. It is no coincidence that our company has seen some of the largest market share increases during periods of disruption, including prior recessions and the COVID pandemic. With that, let’s take a moment to put the current macroeconomic backdrop in focus and discuss how we expect to navigate short-term factors influencing the food-away-from-home market.

I will walk through our thoughts on the health of the consumer, foot traffic trends and the impact from inflation and deflation. There has been much discussion about the health of US consumers and their willingness and ability to purchase food-away-from their home. Despite significant discussion of a potential drop off in consumer demand, we have not seen that materialized to date. With that said, there are pockets of the business where a purchase behavior is somewhat softer than what is typical, including the traffic at Convenience stores that just mentioned. This dynamic is a natural reaction to the significant level of inflation that hit the market. In fact, given the rapid price increases for nearly all products and services that run through our economy, the consumer has proven to be more resilient than many would’ve predicted at the start of the calendar year.

While headline inflation has been slow to move lower, we have experienced deflation in our Foodservice segment over the past two quarters. Through this time, we have demonstrated our ability to show growth and adjusted EBITDA margin expansion, despite these deflationary pressures. Through a combination of the work our Salesforce executes on pricing, along with the continuation of the significant positive mix shift to independent restaurants, these deflationary pressures have been very manageable. We would expect this trend to continue if deflation were to persist. However, we are pleased to see deflation lessen and move towards a more neutral position. In fact, trends in the commodity market, particularly the deflationary areas of proteins, has played out just as anticipated with lower levels of deflation sequentially in both August and September.

If this dynamic continues as we expect, Foodservice will likely be back to slightly inflationary at the beginning of the calendar year, which is our fiscal third quarter. By the end of the fiscal year, we expect Foodservice inflation to be back to a healthy, low single digit pace. I’m going to turn it over to Patrick, who will discuss our results and specific drivers, our performance, and then provide more color on our guidance for fiscal 2024 and beyond. I’m going to leave you with a few key themes. First, we believe PFG is very well-positioned in the large and growing food-away-from-home market with exposure across nearly all channels and product offerings. Second, the consumer remains resilient despite multiple years of above normal inflation.

And finally, our company has weathered difficult economic conditions in the past and has grown stronger during periods of volatility. Our view is that the market is stable, and PFG continues to evolve and grow by investing in our people and assets and our effort to produce long-term shareholder value. We’re excited for what the future holds and appreciate your interest in Performance Food Group. I’m now going to turn it to Patrick.

Patrick Hatcher: Thank you, George, and good morning, everyone. As George mentioned, on behalf of our 35,000 associates, we’re excited and proud to share the strong start we had to our 2024 fiscal year with the first quarter results we announced this morning. I’d like to start this morning by reviewing our outlook for fiscal 2024 and beyond. I’ll then review our financial performance and some of the specific drivers across the three segments. I’ll conclude with PFG’s financial position and capital allocation priorities before turning to the Q&A portion of the call. As you saw in our press release this morning, we announced guidance for the fiscal second quarter and updated our full year and long-term outlook. For the second fiscal quarter of 2024, we expect net sales to be in a range of $14 billion to $14.3 billion, and adjusted EBITDA to be in a range of $325 million to $345 million.

A couple of thoughts on what is embedded in our fiscal second quarter outlook. First, we expect the Foodservice segment to continue to experience mild deflation in the quarter, though moving towards flat as we enter the fiscal third quarter. Second, on a total company basis, we will no longer experience the difficult inventory holding gain comparison as these gains largely normalized in last year’s fiscal second quarter. With that said, on a segment basis, Vistar will have a large inventory holding gain comparison in 2Q, which we expect to be reflected in the year-over-year growth rate for Vistar’s adjusted EBITDA. Underlying business results for Vistar remain very strong and we expect nice profit growth from that segment when we reach the back half of the fiscal year.

For the full fiscal year, we continue to look for net sales to be in a range of $59 billion to $60 billion. We now expect adjusted EBITDA to come in at the upper end of our previously announced $1.45 billion to $1.5 billion range. We are essentially flowing through the upside from our 1Q 2024 adjusted EBITDA performance, which was above the upper end of the outlook we announced with 4Q 2023 earnings. This outlook assumes deflation to persist in the Foodservice segment through the fiscal second quarter, rising to flat to up slightly in the back half of the fiscal year. For Vistar and Convenience, we anticipate decelerating inflation through the remainder of the fiscal year, reaching a steady state in the low to mid single digit range by the end of the fiscal year.

Our inflation assumptions have not changed from what we discussed last quarter, and inflation dynamics have played out largely as we anticipated. We are reiterating our long-term outlook, which projects net sales to be in a $62 billion to $64 billion range in fiscal 2025. Adjusted EBITDA is expected to be within a $1.5 billion to $1.7 billion range in fiscal 2025. With that said, we continue to see upside to our fiscal 2024 results as reflected in our updated outlook, and we are increasingly confident that we will be comfortably within the adjusted EBITDA range in fiscal 2025. As you can see from our outlook for the next two fiscal years, we are confident PFG’s current trajectory and believe that our business is on solid footing. Let’s review some of the highlights from our fiscal first quarter and underlying drivers of our performance.

In our first fiscal quarter of 2024, PFG generated total net sales of more than $14.9 billion, a 1.5% increase year-over-year. Our sales performance was driven by a 2.6% increase in total case volume growth. Our case performance is particularly strong in our highest margin channels, including independent restaurants and several of Vistar’s end markets. Independent restaurant cases increase 7.6% in the fiscal first quarter, another outstanding result that reflects market share gains and that important part of our business. Once again, our independent case growth was due to new account wins, which increased 7.5% in the period. Importantly, while our chain volume was down modestly in the quarter, the rate of decline was sequentially better in 1Q 2024 compared to the fourth quarter of last fiscal year.

We will continue to run our chain business by partnering with strong and growing chain accounts. Total PFG gross profit increased 5.6% in the fiscal first quarter to $1.7 billion. We continue to show nice gross profit performance and margin expansion due to a positive mix shift across our businesses. Our gross profit performance in the quarter reflects our ability to produce solid profit growth despite a deflationary environment in the Foodservice segment. Gross profit per case was up $0.19 in the first quarter compared to the prior year’s period. In the first quarter, PFG reported net income of $120.7 million, a 26% increase year-over-year. Adjusted EBITDA increased about 8% to approximately $384 million. Diluted earnings per share in the fiscal first quarter was $0.77 and adjusted diluted earnings per share was $1.05, a 24% and 6.5% increase year-over-year, respectively.

Total company inflation continues to moderate due to a deflation in the Foodservice segment and slowing rates of year-over-year inflation in both Vistar and Convenience segments. Total cost inflation was 3.1% in the fiscal first quarter. The deceleration was driven by our Foodservice segment, which experienced 2.3% deflation in the fiscal first quarter. Vistar inflation continued to trend lower in the quarter, though still remains elevated compared to historic norms and finished the quarter in the high single digit range. Directionally, the Convenience segment is experiencing a similar dynamic, showing high single digit inflation in the fiscal first quarter. I’d like to conclude our remarks today with some thoughts on our financial position, including our cash flow generation, balance sheet, and capital allocation priorities.

PFG continue to generate healthy operating and free cash flow in the quarter. Operating cash flow was $87.1 million in the first three months of fiscal 2024. This was a very strong result that included some additional investments in inventory towards the end of the quarter. In particular, we had a large tobacco buy in September. As you’re aware, we periodically build inventory in certain products, including tobacco and candy, and then sell that inventory through the subsequent quarter. We expect to see positive cash flow generation in future periods from the sell-through of this tobacco inventory. After investing $53.2 million in capital expenditures, PFG generated $33.9 million of free cash flow. Investing in our business remains the top priority for our company.

This primarily includes growth projects to build additional capacity to support our long-term growth aspirations. For example, we are very excited to have opened the new foodservice facility in our home Virginia market. We believe that investments like these will generate significant returns over time, adding to our top line growth, while making our company more efficient. After capital expenditures, we have three main uses for our additional cash flow, including M&A, leverage reduction and share repurchases. We evaluated these decisions based upon the value we believe each would create for our shareholders and strategically deploy capital against this view. Our share repurchase program considers the value of our stock as well as the relative valuation compared to historic levels.

In the fiscal first quarter, PFG repurchased half a million shares for a total of $28.1 million. Subsequently, in fiscal October, the company repurchased approximately half a million shares for a total of $27.9 million, which is an average cost per share of $55.69. We are confident in our long-term prospects and reflect this through our share repurchases. We also continue to look at strategic M&A as another avenue of shareholder value creation. We are proud of PFG’s track record of integrating acquisitions throughout our history. With the exception of small immaterial deals, we have not completed larger scale M&A since the close of Core-Mark just over two years ago. The team is working as hard as ever to identify interesting opportunities while remaining discipline on price and strategic fit.

We credit our past success in M&A largely due to our due diligence process, and we are unwavering in our methodology. We believe that this process has become increasingly more important in the current interest rate environment. Finally, we have focused our efforts on maintaining a healthy balance sheet. We have been right at the midpoint of our 2.5 times to 3.5 times net debt to adjusted EBITDA target for several quarters and feel very comfortable in this range. We close the fiscal first quarter again right at the midpoint of the target range. We also carefully consider the balance between fixed rate and floating rate debt and use interest rate swaps to convert a portion of our ABL balance to a fixed rate. At the close of the fiscal first quarter of 2024, 76% of our total outstanding debt was at a fixed rate, including the swap contracts.

We believe our current level of debt provides ample flexibility to fund our ongoing operations, while leaving room for the capital allocation priorities I just highlighted.

well- positioned: Thank you for your time today. We appreciate your interest in Performance Food Group, and with that, we’d be happy to take your questions.

See also 20 States With the Highest Gas Prices in the US and 15 Countries with the Highest Alcohol Consumption in Europe.

Q&A Session

Operator: [Operator Instructions] And we have our first question from Edward Kelly with Wells Fargo.

Edward Kelly: Hi, guys. Good morning. Nice quarter. And thanks by the way, for all the color around the various puts and takes here. George, I wanted to follow up on the macro, I guess part first. Can you just maybe talk a little bit more about the cadence of the growth in the case volume during the quarter, especially the independence? You started off pretty hot in that department, which you mentioned last quarter. Just curious how things sort of played out since then, and then what you’re seeing so far in the second quarter. And then just thoughts — as it pertains to the guidance, how you’re thinking about case volume trends, and the sustainability of what you’re seeing today through the rest of the year.

George Holm: Yeah. We started the fiscal year off very strong, particularly in our independent business. We had — I think we were 7.8 I think the quarter before, and we were just slightly under nine in July. And in the month of August we were only slightly over six. And then in September it came back to that mid seven. I think all-in-all, I mean, we would like to have been stronger obviously, but I do like to consistency that we’re seeing now versus kind of that COVID period where you could have a three one week and a 14 the next, and it was very volatile. As far as guidance, we think where we’re at now was — is probably about where we’re going to stay. We didn’t — we did that with 7.6 increase in cases, but 7.5 increase in customers, so we’re still not seeing good growth right at the customer level.

And that’s in spite of selling more SKUs to the customers than we were selling to them a year ago. So it just shows me at that restaurant level there, there’s still some softness. We do expect to see our national account business be better as we get further into the year. We thought that last year too, and it didn’t materialize, but we’re pretty confident right now that as we get to the back half of the year, we’re going to see some case growth in national.

Edward Kelly: And just a follow up. If we look at gross profit dollar growth, and you back out that procurement headwind, gross profit dollars were probably up, I don’t know, 7%, around that maybe or maybe on just under 3% case growth. A couple things here. You mentioned cost of goods sold optimization even before mix in the press release. Can you talk a little bit about what that is, sustainability of that? And then as we have, inflation come back into the business into the back half of the year, talk a little bit about how that impacts that relationship across gross profit dollar growth versus volume growth.

George Holm: Well, I think inflation’s our friend, not when it gets too high, it just has too much of an impact on the macro, but we tend to be able to continue running the margins in an inflationary environment that we do even when it’s slight deflation that tends to help us. Most of our margin growth we had in the quarter over the previous year really had to do with mix. The mix within each one of the businesses, and of course, the case growth being so much better and independent and our margins being better there. And that should continue for real. Look at the, the fiscal year, we’ve got a little headwind in inventory gains last year to go up against Vistar Q2, but it’s not anywhere near what we’ve dealt with in the quarter that we just ended, particularly in our Core-Mark business.

Patrick Hatcher: Yeah. Ed, I’ll just add real quick. If you think about what we’ve explained as our strategy around margin expansion, independent cases, but also penetration with brands, growing the Vistar channels, food and Foodservice and the Convenience, all those are really working very well for us.

Edward Kelly: Great. Thanks guys. Good luck this quarter.

Operator: And we have our next question from Mark Carden with UBS.

Mark Carden: Good morning. Thanks so much for taking the questions. So to start another question on the independent business. Are you guys surprised that the resiliency of this customer is set? Do you think there’s much of a benefit for more normalized peak hour labor at independent restaurants? And then also within your independent business, where are you seeing shifts in demand?

George Holm: Yeah. As far as being surprised, I think when you look at the restaurant industry right now, and you hear a lot that it is slower and it is certainly — the information that we get, transactions are down, but people are spending more money in restaurants than they did a year ago. Now that’s led by menu inflation. So it’s just kind of an odd time where we’re experiencing this inflation in the menu, but we’re experiencing in Foodservice, we’re experiencing a deflation on our product. And I think that that’s just because it took restaurants a while to get those price increases in. I think some were afraid to raise their price, which is understandable, and some — prices were going so quickly they, they didn’t want to undershoot.

I actually think some overshot, because they didn’t expect this deflation to come. So I don’t think the — I don’t look at the restaurant industry is being slow or the consumer backing off from restaurants because they are spending more money than they were before. And as these menu prices get more accepted, I think we’re going to get back in that position to where traffic comes back.

Mark Carden: Got it. And then as my follow up on the Salesforce build, at this stage, are you still expecting to add many more additional salespeople or is that largely done at this point? And then how should we think about how long it can take for these new salespeople to reach their full productivity? How much of a tail is there?

George Holm: Yeah. Because we felt like we got behind during the pandemic, we did go through a period of a few months where we actually had 10% more salespeople than the previous year. And right now, if you look at the three different numbers, we’re around seven and a half case growth. We’re around 7.5% increase in customers, and we’re about 8% in our number of salespeople. And I think that for us 8% is strong. It’s not what we’ve typically done in the past. We will probably come down off of that number some, and we have such a wide variance. And you’d asked about how long it takes them to start to be more productive. We have such a wide variance. We have people that come to us with no experience in the industry and it might take them a couple years.