Performance Food Group Company (NYSE:PFGC) Q2 2023 Earnings Call Transcript

Performance Food Group Company (NYSE:PFGC) Q2 2023 Earnings Call Transcript February 8, 2023

Bill 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 regarding our 2023 Fiscal Second Quarter Results this morning which can be found in the Investor Relations section of our website at pfgc.com. During our call today, unless otherwise stated, we are comparing results to the same period in our 2022 fiscal second quarter. As a reminder, in the second quarter of fiscal 2022, we changed our operating segments to reflect how we manage the business. 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 at 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. Accordingly, the segment results for the second fiscal quarter of 2022 have been restated to reflect this change. 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. The momentum we saw in the fiscal first quarter carried through in the second quarter with solid top line results and larger-than-anticipated margin gains which drove a nice profit beat compared to our published expectations. We are also experiencing, very encouraging signs in the more recent weeks, with an acceleration in our case growth, particularly in the independent restaurant channel. Some of this improvement may be related to the impact from Omicron in the prior year period. However, we believe there are signs of more stable landscape to begin calendar 2023. Our business units, are also operating at a very high level, producing outstanding top line results while driving efficiencies to fuel our profit growth and margin expansion.

This aligns with our 3 main objectives which include consistent profitable top line growth, adjusted EBITDA margin expansion and leverage reduction. As you can see from our fiscal second quarter results, we are making progress on all 3 of these fronts. Which we believe will drive long-term shareholder value. This morning, I will provide a few thoughts on our business results, economic factors and our vision for the future. Patrick will then review our financials and guidance assumptions. As you will hear from Patrick, we are pleased to be raising the bottom end of our fiscal 2023, adjusted EBITDA guidance range, just the month we moved from the increase we announced at the ICR Conference. We also reiterated, our 3-year outlook and believe we are very much on track to achieve these targets in fiscal 2025.

In a moment, I will talk through the reasons that we feel confident in our outlook for this year and beyond. We have designed our business to be successful in a range of operating environments, with 3 distinct operating segments. Each with its own model characteristics and growth opportunities. We are already seeing the benefits from this structure and believe it makes us unique in the marketplace. A few thoughts on how each of these business units are achieving success. I will begin with our Foodservice segment. Strong operating results in Foodservice in the fiscal second quarter, were similar to trends fiscal first quarter. Our independent restaurant case growth outpaced independent industry growth yet again, offset by softer chain restaurant business.

As we have described, some of the softness and changes related to business we have exited. In addition, there is softness in foot traffic, that is producing lower same-store sales for our customer base. We believe, we have struck a good balance within the national chain account business, with a focus on profit contribution and return on capital. In the independent restaurant area, our results continue to impress. Our organic independent restaurant cases grew 4.3% and in the fiscal second quarter, just below the 4.6% growth, we experienced last quarter. We have high expectations for our independent case growth and are working hard to improve upon these numbers. However, in the context of the operating landscape and the market share data we receive, we are very pleased with our performance compared to the industry trends.

Once again, our growth in the independent restaurant case came from the addition of new accounts. In fact, new account growth exceeded case growth which is rare for our company. We are pleased with the pace of new account additions and believe that these customers will provide a long runway for volume, sales and profit growth in the future. Furthermore, in the month of January, independent case volume was quite strong. Which was certainly encouraging. However, we do feel our comparisons were impacted by Omicron last year. We’re also seeing success in our performance brands which continue to do exceptionally well and once again achieved record levels of independent restaurant penetration. Company-owned brands have filled an important need for our customers, providing high-quality products at a good value and help with customer retention.

This helps offset persistently high year-over-year inflation without sacrificing quality. We continue to expand our company-owned brands with new product offerings and new categories. Inbound and outbound fill rates for Foodservice have continued their steady march forward. By the end of fiscal second quarter, inbound fill rates were approximately 97% for Foodservice, without bound fill rates approaching 99%. We believe there is still room for improvement on the inbound side. However, we are getting increasingly close to historic levels from our supplier community. Before moving on, I wanted to speak to the inflationary environment in Foodservice. Once again, during the second fiscal quarter, inflation decelerated month by month and ended the quarter at 9.6%, for our Foodservice products.

We continue to believe that inflation normalization is healthy for the market, our customers and their consumers and we are pleased to see the year-over-year inflation declining. Still, we must manage the dynamics closely, to remain competitive in the marketplace while not sacrificing profitability. We have systems in place to accomplish this goal and feel comfortable that we can remain successful in a decelerating inflationary environment. In fact, during the second fiscal quarter, our inventory holding gains were down year-over-year due to the decelerating rate of inflation. This was true in both Foodservice, Convenience and as a total company. This is to be expected and how we have modeled our full year guidance. Our ability to grow profit and margins without the same level of holding gains demonstrates our company’s ability to manage through this environment and should provide confidence in our profit path in the quarters ahead.

Turning to Vistar. The recovery continues in many of Vistar’s channels which is reflected in another strong quarter for the segment. Total Vistar case volume was up in mid-single digits, compared to the prior year period, driven by growth in multiple channels, including office, coffee and vending. At the same time, the theater channel did not quite live up to the high expectations for December, with several blockbuster releases not generating as much office revenue as was originally expected. Again, in the high-quality sales and profit results despite a slower recovery in the theater channel, speaks volume about the execution of that organization. Another encouraging sign for Vistar is the improving inbound fill rates, while still tracking well below historic levels, fill rates have moved steadily higher throughout the first 2 quarters of the fiscal year with inbound rates now in the mid-80s with outbound rates in the high 80s.

Suppliers have indicated that better access to raw materials and stability in the workforce are producing improvement in fill rate levels. There is still room to go but there is another tailwind working in Vistar’s favor, that we believe will help support top line momentum. Finally, a few comments on our Convenience business. We are pleased with the direction of this segment and see significant profit growth opportunities in the years ahead. In the fiscal second quarter, Convenience did see a moderate decline in profit due to the lower inventory holding gains, that I just discussed. Excluding the inventory gains in both years Q2, Convenience segment’s adjusted EBITDA would have grown nicely compared to the second quarter of 2022. I will also note that Convenience results — Convenience results in the month of January were excellent versus January of 2022.

The Margin expansion in the Convenience segment is being driven by several factors, including better top line mix and operating efficiencies. We are particularly pleased with the growth of our non-nicotine portfolio which experienced another quarter of mid-teens sales growth year-over-year. We believe, that if a significant amount of shareholder value derived from the Core-Mark transaction, will come from PFG’s ability to grow food and Foodservice-related products due to the convenience channel faster than Core-Mark could have, as a stand-alone company. We are seeing this play out in the market but believe it is still early days. We have a steady pipeline of potential new business in the Convenience space which we expect to produce consistent top line growth for the segment.

We’re also right on track to achieve our 3-year synergy target of $40 million. We remain very pleased with how the integration of Core-Mark has proceeded and are excited for what’s to come within the Convenience segment of our business. In summary, we closed calendar 2022 with good company results, beating our previously announced profit expectations through a combination of high-quality top line growth, positive product and channel mix shift and consistent productivity improvements. The operating environment has provided some challenges, though, it was steady through the quarter and we are seeing some hope signs early in calendar 2023. Our organization has done an excellent job driving efficiencies which has produced consistent top and bottom line results for the company.

Photo by Eiliv Aceron on Unsplash

While there is still some uncertainty in the broader macroeconomic environment, we believe our outlook for future is bright and there remains significant opportunity to keep our growth momentum going. With that, I will turn the call over to Patrick, to review our financial results and outlook in more detail. The CFO transition from Jim to Patrick has been excellent. It is typically a challenge to enter a new role and often even more challenging to exit. Jim and Patrick accomplished a smooth transition which has been seamless for our organization. Patrick?

Patrick Hatcher: Thank you, George and good morning, everyone. Our business results in the fiscal second quarter of 2023 exceeded our announced expectations. With sales in the quarter at the top end of the outlook, we discussed on our first quarter earnings call and adjusted EBITDA nearly $30 million above the outlook we provided at that time. Our operating performance has allowed us to build upon an already strong financial position. As George mentioned, this is my first earnings call in the CFO role for PFG. I’m excited to continue to help lead the organization to new heights and have entered my new role with a strong business position. Our main strategic priorities are unchanged and we will focus on 3 areas to drive value: Sustained profitable sales growth, adjusted EBITDA margin expansion and lower leverage.

I’m pleased to report, that we once again, made progress in all 3 areas during the second quarter and we are optimistic that this will continue. Before reviewing some of the financial highlights from our fiscal second quarter, I’d like to review 2 important areas: cash flow and leverage. Our organization has been diligently focused on driving strong cash flow which is an important objective in our growth strategy. Over the first 6 months of fiscal 2023, PFG generated approximately $425 million of operating cash flow, through a combination of our solid business results and improvements in working capital. This was significantly higher than our cash flow in the prior year period, despite tobacco purchases that occurred towards the end of calendar 2022.

We expect these tobacco purchases to be cash generative, in the fiscal third quarter of 2023. With this operating cash flow, we invested about $98 million in CapEx during the first 6 months of fiscal 2023. These capital projects are vital to our long-term growth and are primarily focused on increasing our warehouse capacity, improving supply chain technology and streamlining our operations. Investment back into the business will remain one of our top uses of cash and sustains our long-term sales growth and margin improvement objectives. After taking capital spending into account, PFG generated about $326 million of free cash flow in the first 6 months of fiscal 2023. The vast majority of this cash flow went to reducing the outstanding balance on our ABL facility.

This gets to another key priority, reducing leverage. Last quarter, we shared that we have reduced leverage to just below the top end of our 2.5 to 3.5x target range. We were pleased with this achievement, as we moved into our target range faster than we anticipated. This focus has continued to pay off and at the end of our fiscal second quarter, we achieved a 3.3x leverage ratio on a trailing 12-month basis. We believe that lower leverage, particularly in the current interest rate environment is a good value-creating use of cash flow for our investors and other stakeholders. Our balance sheet and debt position is strong. At the end of the fiscal second quarter, about 76% of our outstanding debt was at a fixed rate, including swaps we have in place against a portion of our floating rate ABL facility.

While our average interest rate on the ABL facility did move higher along with the broader market, we have mitigated a significant portion of our floating rate exposure. We are well equipped to manage the interest rate moves but keep in mind, that we would expect our average interest rate to move along with the market on the portion of our ABL facility that is not hedged. With that, let’s review some highlights from our fiscal second quarter. As disclosed at the ICR conference, a month ago, PFG total net sales increased 8% in the second quarter to $13.9 billion which was at the very top end of the outlook we discussed during the first quarter earnings. Total case volume increased 3% in the second quarter, driven by growth of independent restaurants as well as gains in Vistar and a smaller contribution from an acquisition.

Total independent cases were up 6.6%, in the second fiscal quarter, while organic independent cases increased 4.3%. Outperformance in the independent case volume continues to reflect market share gains and new business wins in that important high-margin business. Total PFG gross profit increased 17%, compared to the prior year quarter. Gross profit per case was up about $0.81 in the second quarter compared to the prior year period. In the second quarter, PFG reported net income of $71.1 million and adjusted EBITDA increased 28% to about $309 million. Inflation continues to impact our business. And as George discussed earlier on the call, inflation continued to moderate to lower year-over-year inflation, in the Foodservice segment. Total company cost inflation was 10.3% in the quarter.

This included a 9.6% increase in Foodservice. Vistar inflation remained at the mid-teen level in the quarter while Convenience experienced inflation just above 10%. Inflation for both Vistar and Convenience, were very similar to what they experienced in the fiscal first quarter. We continue to expect lower levels of inflation through the remainder of fiscal 2023 which is the assumption embedded in our outlook. Our early read on January supports this view with inflation, particularly in the Foodservice segment continuing to slow. On a consolidated basis, inventory gains were lower in the second quarter of fiscal 2023, with a notable decline in Convenience and a smaller decrease in Foodservice, partly offset by a slight increase of Vistar. We are pleased with our total company profit result which more than absorbed, the lower inventory gains compared to the prior year.

We expect a similar dynamic through the rest of fiscal 2023 and into the first quarter of fiscal 2024. However, beginning in the second quarter of fiscal 2024, the comparisons eased considerably, based on our most recent results and expectations for decelerating inflation over the next 2 quarters. The company’s second quarter adjusted EBITDA margins increased 33 basis points compared to the prior year period, a solid result in any operating environment. However, this margin performance was even more impressive considering the headwind from lower inventory gains. Excluding inventory gains in both periods, total company adjusted EBITDA margins would have increased even more year-over-year for the quarter. We expect net gains from worker productivity, including lower overtime and temp costs to help offset the inventory gain headwind over the next 3 quarters.

Diluted earnings per share was $0.46 in the second quarter and adjusted diluted earnings per share was $0.83. As you saw in our earnings release, we have reiterated our full year 2023 revenue outlook and raised the bottom end of our full year adjusted EBITDA range. This comes just a month after increasing the adjusted EBITDA range at the ICR conference and it reflects our confidence in the underlying business momentum and consistent execution from all 3 of our businesses. In the fiscal third quarter of 2023, we anticipate $13.7 billion to $14 billion, in net sales. We also expect adjusted EBITDA in the range of $270 million to $290 million in the fiscal third quarter. Remember that the seasonality of our fiscal third quarter typically reflects lower sales and profit in the months of January and February with an acceleration in March.

For the full year, we still anticipate net sales in a range of $57 billion to $59 billion. Adjusted EBITDA is now anticipated to be in a range of $1.27 billion to $1.35 billion, up from our prior $1.25 billion to $1.35 billion expectation. As George mentioned in his remarks, this keeps us on track to achieve the 3-year fiscal 2025 targets, we set at our June Investor Day. To wrap up, our company is in a great financial position which is reflected in our earnings results and financial outlook for the remainder of the fiscal year. We are making great progress on our 3 focus areas: sustained profitable sales growth, adjusted EBITDA margin expansion and lower leverage, while generating significant operating and free cash flow. Our organization is executing our strategy and we are well positioned to continue to create value for our shareholders over the long term.

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.

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Q&A Session

Operator: We’ll take our first question from Edward Kelly with Wells Fargo.

Edward Kelly: Nice quarter. I want to first, just touch on the procurement inventory gains. Just can you talk about how these gains in Q2? I know they’re down year-over-year but how do they compare to what you would consider normal? And then, as you progress through the back half, what’s the — I don’t know, is there possible to sort of quantify what that headwind would look like and then the timing of when the productivity gains would offset that?

George Holm: Yes. First of all, I would say that last quarter was fairly normal for inventory gains. Below normal for Core-Mark. We think, it makes sense for us to call these out. We have always had them. We’ve been very aggressive because of the inflation that’s been out there and we’ve done a pretty good job of anticipating where these increases would come and carrying additional inventory. So, I think, we’re in an unusual period for last year and for this year. And that’s the only reason we call those out but they’re part of, I guess, I would call it our quarterly life around here. As far as the back half of the year, the quarter that we’re in now was very good last year, higher than normal for inventory gains. Q4 a little more so and then Q1 of next year was when we peaked.

And as I’ve mentioned before, those come from sequential inflation, not really from inflation from the previous year. And the sequential deflation that we’ve had the last couple of quarters is what’s kind of tempered that. But we still made some very good buys. And then in the Convenience area, we have one that we did last year that we recognized the profit in Q2 that we’ll be recognizing the profit in Q3, this year. As far as, how those are going to affect our results, they’re certainly built into the guidance that we give. And we’re in a little bit of a race here that during the period of time where we had additional inventory gains above and beyond normal. We also had very high operating expenses, particularly overtime and temporary health.

And those are dropping at a pretty good rate right now, unfortunately, not as fast as we would like to see it drop. So will that balance each other out? I’m not sure. But we’re not expecting that in our guidance, for them to balance out. We’re expecting to have couple of quarters at least, where our inventory gains are not as good as last year but I want to stress that, that is in our guidance.

Edward Kelly: Great. And just a follow-up on the guidance. I mean, you’ve had a very nice beat in the first half of this year versus how you initially thought the year would play out. The back half, I guess, along the way, you really kind of haven’t touched. I’m just kind of curious as to — how you’re thinking about the business now going forward versus sort of like what your initial expectation would have been. I thought I heard you at the beginning of the call when you talked about this acceleration in January. I thought, I heard a little bit of a tone of optimism, I guess, that moving forward. So maybe you could sort of wrap that into how you’re, I guess, really feeling about the business now moving forward in the back half and then as you progress into the next fiscal year?

George Holm: Yes. Well, everything we hear concerning the macro can be confusing. But all in all, the industry is not doing real great right now. So we figured that we’re better off to be cautious about what kind of guidance we give for the second half of the year. A little bit to do with the inventory gains, not as much. January, the thing about January in our industry and certainly in our company is we’ve had really good Januaries and just had average Q3s and we’ve had bad Januaries like last year and ended up actually with a good Q3 because about half our earnings occur in March. So yes, definitely an optimistic January, very optimistic actually in all of our businesses. The first week of February, if exclude the parts of the country that were really negatively impacted by weather, also very good.

I look back at last year and it seemed to be that Valentine’s week when we started to really improve and March was a fantastic month. So much more difficult comparisons. So that’s it in a nutshell, Ed. We’re just trying to make sure that we’re giving guidance that we have a strong belief in.

Operator: And we’ll take our next question from Jake Bartlett with Truist Securities.

Jake Bartlett: Mine was just on digging into the strength that you’ve seen in January. And just the underlying momentum of the business. I’m wondering whether you could frame that in terms of pre-COVID — the 3 years. As I look at what you’ve reported for organic independent case growth, there was a slight acceleration on the independent organic growth versus ’19? And so, I’m just wondering whether you can — whether that’s accelerated. I calculate roughly 20% growth. And so wondering whether it’s actually accelerated in January, just so we can kind of take out the noise of Omicron.

George Holm: It’s — that’s why we mentioned earlier that we were encouraged by January — I mean, once again, it’s January. But yes, there was an acceleration over the fiscal ’19 numbers. It wasn’t as extreme as the acceleration over fiscal ’22 numbers. And even, our Q2 where we were slightly less than Q1 for independent growth, we were ahead of it going into those last 2 weeks of the quarter. Something that happens once every 7 years in our business is that the holidays fall on a Sunday and it wipes out Saturday night which is typically a very good night. So even though I’m sure for restaurants, the Saturday night, New Year’s Eve was real good but Saturday night is good, whether it’s New Year’s Eve or not. So we expected that.

It was probably a little bit more than normal but it’s just one of those things that happens in our business. So we feel from Q1 to Q2, that we did have a slight acceleration but from Q1 to Q2 versus the share numbers we get; we had a nice acceleration. So, I think, when we look at kind of that 3-year stack, I think is what you’re referring to, fiscal ’19 to fiscal ’23, we feel excellent about that.

Jake Bartlett: Great, that’s really helpful. And then, I’m wondering in terms of the sales guidance for the third quarter, at the midpoint, it’s a little bit down from the second quarter. I look historically, it looks like Convenience has a seasonally weaker third quarter. I’m just — if you can frame whether that slight deceleration at the midpoint is due to more seasonal factors, or if that’s reflecting some of the challenges that you’re seeing in the macro basis. Trying to kind of judge whether that there’s some kind of unusual deceleration there or whether it’s just more seasonal?

George Holm: Yes. All of our businesses, the third quarter is typically the lightest revenue quarter. But if — also a big impact too is, tobacco is really declining at a pretty heavy rate right now which, all in all, is not a bad thing. It’s not a big margin producer. But it certainly has a big impact on the top line. And I would say that’s probably it. Our national account growth, where I mentioned, I think it was 2 calls ago, by fiscal third quarter, we’d be running growth. I’m not so sure that’s going to happen. We’ve played out from an account standpoint exactly. I mean, exactly as we had wanted it to go but there’s some real softness in that account base. So that’s probably a little bit of it too.

Operator: And we’ll take our next question from John Heinbockel with Guggenheim.

John Heinbockel: So George, I want to start with why do you think independent case growth is less than new account growth, right? And within the context of that, your thoughts on salesperson bandwidth and capacity, right? Because they’re doing a lot more volume than they did 3 years ago. Where are we on that? And do you think, you need to grow the sales force faster to see a pickup in independent case growth?

George Holm: Well, I think that the biggest thing in the accounts growing faster than the case as part of it may be — we have a — I think, we always have an emphasis on new business but we’ve had a little bit more of one than typically because we’re finding that at the customer level, that we’re doing, on average, less business than we were doing the previous year, this is on average with our customer base and independent. Yet we’re selling them slightly more SKUs than we used to sell them. So that just shows that the volume down at the account level. Now January, a lot of the improvement was new accounts but we also had improvement in penetration within the accounts. We actually were positive in the month of January. And that’s why I think, part of our increase has been due to the Omicron in the previous year.

Then as far as salespeople, we have made big investments in the last couple of quarters. I had mentioned before that we’ve kind of gotten behind. Right now, our percentage increase in number of salespeople is the most we’ve had in several years.

John Heinbockel: Okay. And maybe for Patrick. Given your closeness with Vistar, right? So Vistar profitability, at least this period was several hundred basis points above, right, where it’s kind of been running. Your thoughts on the source of that? And then where do you think, right? It looked like it was settling in maybe in a 5% to 6% range which was higher than pre-COVID. Is that still sort of where we’re settling at? Or maybe it’s higher than that now?

George Holm: No, I’m going to go ahead and take that. John, just because needless to say, Pat has been very busy the last quarter.

John Heinbockel: Okay. Yes, sure. Go ahead.

George Holm: Our return on sales or our EBITDA margins in Vistar has always been more volatile than us, as a company. And I’ve explained this before but I think I should do it in a little bit more detail. We have parts of our business in Vistar that have very high case cost. Very low gross margin very low expense ratios and low EBITDA margins. We have parts of our business that are low case cost. They are high margin, they are high expense ratios and they are high EBITDA margins. Then we have our pick and pack business, where there’s a lot of eaches out of those, particularly the 3 distribution centers totally dedicated to that. And that is high margin, high expenses, high EBITDA margins. Then we have a fulfillment business which we feel we’re going to show some real growth in a couple of quarters with.

But there, we do not get involved in the accounts receivable on that product. We’re fulfilling those orders, most often for the manufacturer or the online site. So all we’re billing is our fee. So there is extremely low case cost average and almost all of it is margin. So it has extremely high margins. And then inventory gains can change quarter-to-quarter based on what kind of job we did of anticipating increases. And so there’s a lot of volatility in there and there’s a lot of volatility in the EBITDA margins. But when it comes down to how we do as far as the percentage of the gross profit dollars that we put to the bottom line, is pretty stable. And John, I don’t see that changing. Actually, I would like to see our fulfillment business become a much bigger part of our business.

Operator: And we’ll take our next question from Alex Slagle with Jefferies.

Alex Slagle: Just following up on the previous questions, that the restaurant industry traffic seemingly still subdued. I wonder, if you could talk about your incremental efforts to drive an acceleration in the new customer wins and independent business and what you’re doing to drive that? It does sound like ramping the sales force a little bit more and — maybe any comments on how you’re incentivizing your sales force or other levers to drive further acceleration in that?

George Holm: Yes. We really — we don’t offer up promotional activities, that are national or things that we go to our people with. It’s really all around growing our sales force. And we’ve always found that, if we’re doing the right training and we’re hiring the right people, that we’re going to grow our business faster than we grow our sales force. And it’s pretty simple but that’s how we look at it. And I think that we’ve been able to hire some good people of late. We got some intense training going on. A lot of them have already been cut loose and we’re ready to let them all cut loose. I guess, it’s just no different than that.

Alex Slagle: Got it. And then just on productivity and your efforts around matching your staffing levels to the volumes which have been seemingly more volatile and hard to predict. Just kind of seeing — do you see any opportunity for improved tools or processes or anything you’re working on to help drive better productivity here and hopefully, the volume trends do stabilize some more into February and March but any thoughts there?

George Holm: Yes. Patrick is going to take that. Because he’s much closer to what we’re doing there.

Patrick Hatcher: Yes, Alex, thanks for the question. So first of all, when we think about labor, we’ve been really pleased. It’s been slow but it is improving. And when I think about what’s going on in the field and our leadership in the field and how they’re working, every day on the hiring and retention and training of our warehouse and drivers. Again, we’re really pleased with the progress they’re making. It’s slow and it’s slow because the one area that we want to continue to see more improvement, is on retention. But because of their success so far, we really have seen the temp labor come out of the system for the most part. And we’re also seeing overtime reduced. So, as George mentioned earlier in his comments, we really think that why it may not match it perfectly but over the next several quarters, this is going to be — it has been a headwind but it will become a tailwind, it will help offset some of the comping that we’re going to have to do with these inventory gains.

So, we do see this as a positive going forward and we’re really pleased with the progress we’ve made to date.

Operator: And we’ll take our next question from Mark Carden with UBS.

Mark Carden: So to start, it sounds like you guys have made some really nice progress on fill rates. Presumably, on the inbound side, it’s picked up a bit across the industry. Given that, have you seen any smaller competitors taking any more aggressive efforts to maybe win back some of the share that they might have given up when inbound fill rates are more challenging? Do you see that being much of a risk? Or has the new business that you’ve gained, really just proven to be pretty sticky?

George Holm: I think that nothing’s really changed from the competitive landscape. There’s probably a little bit more activity going on as far as short-term procuring of an account or picking up some business within account but — we’ve done some of that ourselves in the past and it seems to do exactly that. It works pretty good short term and doesn’t have an impact long term. So we’re just kind of continuing to do business the way we do business and price the way in which we price and we really haven’t seen any difference in the marketplace.

Mark Carden: Okay, great. And then as a follow-up, it sounds like overall, some nice progress on new business, good market share gains overall. How about from a category perspective? Are you still seeing strength really across the board and independents? Do any categories in particular stand out? Just what you’re seeing on that front?

George Holm: Yes. Casual dining, obviously, the chains, I mean, a lot of them are public in big season, numbers not doing real great. But the casual dining independent seems to be doing really well and that’s been good part of our growth. Pizza has definitely slowed down in the last year but we’re continuing to gain share and we’re very excited about that business. Hispanic seems to be doing real well, although we don’t play hugely in fine dining, fine dining seems to be doing well. And center of the plate — has been a big hit for us. I mean our margin growth has really been around our change in mix just in and mix of customers, mix within our channels but product mix has been a big contributor to that, too. Some of our highest profit per case items have been where our growth has been good.

Operator: And we’ll take our next question from Brian Harbour with Morgan Stanley.

Brian Harbour: Yes. Is there any way you’re able to quantify kind of the impact of some of the business that you said, you had exited? And then just kind of to the point you just made, was — is the softness more on the casual dining side that you’ve seen in the most recent quarter or anything else that you would call out there?

George Holm: Yes, I would say, to answer your last question, I would say casual dining is where we are seeing the most slowness. As far as exited business, we are — I think there’s different ways to look at that word. It’s extraordinarily rare for us to tell a customer we don’t want to do business with them anymore, very, very rare. But exited, we’ve gone and we’ve had to get a higher price to be able to handle that business. And in some instances, the customer isn’t willing to do that. And we’ve been in a position — I’ve mentioned this probably, this is probably the third call but maybe too much but when you have excessive overtime and you have an excessive amount of people who are temporary, you can have business that’s typically may be marginally profitable with a good return on capital that becomes unprofitable.

And that’s the position we were in. And we just did it pursue some business, as heavily as would in the past. We think we’re getting there, where maybe we can be a little bit more aggressive. But there’s still a high cost that we’re dealing with and to have, I guess, to bring on business that is going to be difficult to grow if they’re not growing — that’s why I’ve seen some real flatness or declines in our national account business. And our focus is just — I mean we like those type of business and we like all business and we like those customers. But for us, our focus has had to be really, really heavily on independent. And I will also say that, we’ve also had Core-Mark growing at mid-teens in their nontobacco business and that’s been a nice contributor for us for growth.

Brian Harbour: Yes, it makes sense. Okay. And could you remind us where just kind of your owned brand penetration is and how that’s kind of driven some of the margin performance that you’ve seen recently?

George Holm: No. That’s one of the best things we have gone for us right now. We just finished a month where it was 51.9% of our independent business. And it’s just not a number that, quite frankly, I expected us to get to. So it’s been really good. And almost — I mean, really close to all of our branded business goes to independent restaurateurs. So we’re really focused on that. It’s doing well. Customers seem to receive it well.

Operator: We’ll take our next question from Jeffrey Bernstein with Barclays.

Jeffrey Bernstein: George, you mentioned in your prepared remarks, the more stable landscape to start calendar ’23. I think, you alluded to it being beyond just a favorable January compare bounce. You’ve also noted that the industry is not doing really well right now. So I was trying to just contextualize because it seems like most of the chains we talked to are talking about surprising resilience in the business and the consumer and whatnot. So I’m just trying to bifurcate between the more stable landscape relative to the industry not really doing well right now? And then I have 1 follow-up.

George Holm: Yes. What we get from third parties show that the industry is in a very, very slow. I mean talking like, not single digit, single point growth. I get the same conflicting things, Jeff. We have chains that are doing really well and are excited in — and don’t know there’s a downturn going on and we have some that are really struggling. And I think it’s that mixed . One of the reasons that I guess, that we use the word stable, is that we’re been in this period of time where we’ve had a single-digit loss business and that’s something that we always had as a goal and could never quite get to. So that’s accounts that we sold last year and don’t sell this year. So they went out of business or we lost the business or something happened. And that’s a stability that we haven’t had in our company to that degree before; that’s where that word comes from, I guess.

Jeffrey Bernstein: Understood. And then just on the commodity inflation or less of it, it sounds like you’re expecting continued easing. Just wondering where you think that goes, whether we’ll be talking about low or mid-single-digit inflation over the next quarter or 2. And thoughts on whether or not, that could turn to the deflation. I know most have not conceded that, that was really, very likely but just wondering how you change, how you manage your business differently, if that inflation ease more quickly and actually turn to deflation?

George Holm: Yes. Well, where we still have fairly high inflation is in Vistar still in Core-Mark, not as much but some inflation. We don’t concern ourselves with deflation there because they typically raise their price in the same pattern all the time and they fight hard to get their prices increases in. And you just don’t see them back off. So I think that’s stable. They may skip some price increases or something like that certainly could happen but deflation, no. In our Foodservice business, particularly our independent, that’s where we really watch at the closest. And right now, we’re seeing our case growth and our pricing almost converging. So — and that’s real recent. So that doesn’t mean that there can’t be something within our mix that we’ll see as we do our inflation numbers at the end of the quarter.

But I think that inflation is right now appears to be headed in our independent Foodservice business for very low single digit. And as far as inflation, I think, we’re set up to handle — I mean deflation, I think we’re set up to handle that well. We didn’t handle it so well when it happened back in the Great Recession but we’ve got some good systems in place and a more experienced sales force and we feel fine with it.

Operator: We’ll take our next question from Kelly Bania with BMO Capital.

Kelly Bania: George, I wanted to go back to something that you said at ICR about — the comment about renegotiating terms with most customers, I think, almost every customer and I believe that’s on the contract side. And that’s pretty consistent with what we hear across the board. But I was just curious if you can help us understand the changes in the way that the contracts are structured and negotiated today, versus maybe a few years ago and how that may impact the future of the — how the business performs in the future? And I guess, I’m particularly just curious, if there’s any changes or ways that we should be modeling as we transition here from this higher inflationary environment to a possibly lower inflationary environment.

George Holm: I don’t see, at least within our world that there’s really any changes in how they’re structured. We just needed to get most of that as a fee business and we needed to get a higher fee because of our expenses and we try to do a good job of making sure that we are recouping what we felt were kind of those long-term expenses. Obviously, the operating expenses that we had through the severe part of COVID is not something that you want to pass on to a customer, you’re just going to cause yourself problems down the road. But we were fairly successful, I would say, very successful. We have a good customer base and where we weren’t successful, we lost some business. And that’s just the way it goes. But no, I just don’t see a big change moving forward. And if we go through a deflationary period of time, those customers will benefit from lower costs and they’ll probably in the end, be good for our business, good for our industry.

Kelly Bania: Okay, that’s helpful. And maybe just a follow-up on fill rates. Very helpful color there. I think you gave us for Foodservice in Vistar. Just curious if you have a sense of how you think those compare both on the inbound and outbound metrics to the rest of the industry and your competition?

George Holm: We don’t have a good feel with that. I mean, I guess the only thing that we get is the complaints from customers around fill rates have gone down and gone down a lot. Our Foodservice were almost back to normal, very close. Core-Mark and Vista are still struggling more with inbound. And what I look at because it’s hard to judge in this type of environment has been hard to judge is what our inbound rate is versus our outbound. And are we converting the inbound to a better outbound at kind of a percentage standpoint what we used to when the supply chain was normal and we’ve been able to do real well there. So I would say that we’re probably at least at a par with the industry. I think it helps, too, that we are purchasing people at each of the distribution centers and they’re really tied tight to the sales force and many of the customers, particularly the larger customers and I think that’s helped us.

Operator: We’ll take our next question from Lauren Silberman with Credit Suisse. And it looks like they have removed themselves from the queue. We will take our next question from Andrew Wolf with CLK .

Andrew Wolf: I just wanted to ask you to perhaps tell us a little more about your views and outlook on labor productivity. So what I’ve heard from, what you’ve been saying, George, it sounds like labor costs are coming down. Maybe on an hourly rate as you substitute in sort of normal labor for some of the expensive labor you’ve had to beer. But what is the — what are the trends looking like with labor productivity, given it sounds like you might be early on still training people. And what is the outlook for labor productivity? And where does it need to improve more? Or is it more of a — it sounds like it might be more of a still a warehouse issue than a delivery which sounds like it’s improving more rapidly.

George Holm: Well, it needs to improve everywhere but I’m going to kick that one to Pat. He’s closer to it.

Patrick Hatcher: Yes. I mean it’s a good question. As we talked about a little bit earlier. I mean, what I’ll expand upon my previous answers, just we have some great systems in place. So once we get the people into the warehouse, once they’re trained, we have great systems to allow them to be very — have very efficient productivity. What I mentioned earlier is it’s a retention thing and this is, I think, it’s not a PFG issue, it’s a broader industry issue but we are starting to see some really nice progress, as I mentioned earlier. So — the team is doing an excellent job of recruiting and getting those folks into the buildings, getting them trained. And again, we think that over time, this is really going to become more of a tailwind.

Andrew Wolf: And sort of as everybody’s until recently been using 2019 or actually still using 2019, as a metric. If you look at sales productivity, are you also doing that some kind of pre-COVID normal for labor productivity? And — can you give us a sense of how that curve is going to look in terms of the improvement over the next year?

Patrick Hatcher: Yes. I mean, we absolutely look at pre-COVID numbers as well, just to make sure that we’re measuring to what was, what we’ll call, a sense of normal back then? And then how does that compare to stay. I can’t give you any indication of how quickly we’ll move down that curve because, again, it’s just — there’s so much uncertainty around labor but it’s something we’re very focused on. I can tell you that.

Operator: And we’ll take our next question from William Reuter with Bank of America.

William Reuter: The sequential commentary about your inventory gains over the last year and which are the toughest comps was very helpful. I was wondering if you could share the magnitude in totality of these gains on an LTM basis. Because it sounds like you think that largely, these are going to be offset with productivity savings. So trying to get a sense of what you’re expecting on that?

Patrick Hatcher: Yes, this is Patrick again. So again, just going back a little bit, we started to see these inventory gains in 3Q ’22 and then they stepped up in 4Q ’22 and then again, in first quarter of ’23. And as George was just mentioning, in this quarter, we actually saw year-over-year gains. We were comping negative. So — we can’t really quantify with you today about what that totality of that is. But — and as George mentioned, we’re not even sure, that the productivity gains that we will see will completely timing-wise offset these inventory gains but we’re both — there’s a lot of opportunity on the productivity side. And we have, in our outlook, said that we’ve anticipate inflation to continue to decelerate and that we will see these inventory comps get tougher. But again, all that’s baked into our guidance.

William Reuter: Okay. And then, you’ve been focused on debt reduction of . Your leverage is now kind of within your target range. Are you at the point where you would look at additional M&A or do the higher interest rates in the current environment kind of discourage this activity?

Patrick Hatcher: Well, yes, as you mentioned, we are within our leverage range and we’re obviously very happy about that. And again, we reduced our leverage to 3.3x in the quarter. When we think about uses of cash, we’re certainly, as I mentioned, focused mostly on investing in the business and building our capacity to support the growth of the business. We’re always looking at strategic M&A. So I’ll leave it there, unless George wants to add anything to that.

George Holm: Well, we’ve always been opportunistic acquirers. And I would say that we always will be — so that something could happen there. We don’t have anything that’s actionable right now. But paying down debt, that’s important to us. So is adding capacity. We would rather reduce our leverage by having more earnings as opposed to reducing anything for that matter. We want to grow. And fiscal capacity, I would say that’s probably the most important thing to us today but we’ll always be an opportunistic acquirer.

Operator: And we’ll take our next question from Joshua Long with Stephens Inc.

Joshua Long: Curious if we can talk about, just the overall strength of the supply chain. It seems like things would be improving. You mentioned a couple of times different improvements in fill rates overall. But just curious if you could contextualize just the overall string business supply chain. And then when we specifically talk about some of those fill rate comments, how do you think about that? Are we — although the fill rate percentage is up — what does that look like in terms of the number of items or kind of the assortment versus kind of pre-pandemic? And is that even an important point kind of in the current environment?

George Holm: That’s a good question. I think the supply chain is strengthening pretty quickly right now. I think, we learned a lot going through COVID. It was a fine-tuned supply chain, particularly when you got to perishable product. And when something that, that’s that fine-tuned gets disrupted, it gets disrupted overnight and it takes a long time to correct. And as I said, our Foodservice is getting pretty close to normal. One of the issues with our fill rate in Vistar and Convenience, is that many items just weren’t produced any longer. And the customer continues to order it and we’re seeing many of those items come back online. We’re also seeing that suppliers that were in both the retail and the Foodservice business and maybe bigger in retail and they had all they could due to pack the product, really discontinued many Foodservice items and didn’t have the level of attention to it.

And as a percentage of the food being eaten is swung back greater and greater towards Foodservice, we’re seeing those people come back online. I will say it’s hard to go running back when you’ve had to find other sources but they are coming back. So I would call the supply chain is something that’s not there yet but we’re seeing really good improvement. And number of items — by the way, that’s something that we follow real close by distribution centers, the number of items that they sell on a weekly basis. And most of our companies are still selling less items to availability but it’s improving at a pretty quick rate.

Joshua Long: That’s helpful. And maybe bigger picture, when we think about just contextualizing the holistic strength of the business, in terms of case growth new company — new customer wins and adds, it’s impressive. I imagine there’s also a good bit of investment that happens behind the scenes in terms of capacity warehouse, not just on the sales force side. Can you talk about that and maybe where — how you feel like you’re positioned to sustain or support continued growth at these levels going forward?

Patrick Hatcher: That’s a good question. And as we talked about just in the last 6 months, we’ve invested $98 million in CapEx. And when we talk about our priorities, that’s really the number 1 priority is to continue to invest in the capacity of the business to help it grow. As we just mentioned, another priority is to also reduce leverage. But the number 1 use of our cash, is going to be continuing to invest in the business and given the results of the 3 segments and their strength, we’re going to continue to do that because they’re doing some really nice job of generating some really solid growth.

Operator: We’ll take our next question from Carla Casella with JPMorgan.

Carla Casella: It’s Carla Casella from JPMorgan. You made some good progress paying down revolver this quarter. I’m just wondering if there’s any — I mean, contemplated in your kind of leverage and targets going forward. Is there any thought that you could be out of that facility by year-end or a target of when you want to be out of that facility kind of given the high cost of rates today?

George Holm: Thank you for asking it because there’s a couple of things I wanted to share. As we mentioned in our comments, because we use interest rate swaps, there is a portion of the ABL that is floating but because we’ve swapped 76% of our total debt is fixed and the ABL is at a very attractive rate of LIBOR plus 125 bps. So yes, interest rates are certainly going up and we’re watching that very closely and the portion of our ABL that is floating does move up accordingly. But we’ve done a really good job of managing that interest expense — so there is no expectation at this time that we would be looking to retire that facility and we’ll just continue to manage the interest rate environment the best we can with those swaps.

Operator: We’ll take our next question from Peter Saleh with BTIG.

Peter Saleh: I want to come back to the conversation on the Foodservice and the restaurant space. George, you mentioned that pizza has slowed in the past year, yet fine dining is still doing pretty well. Do you feel like this is the lower-income consumer kind of pulling back? Just any — there’s been a lot of conversation and concern around that in the industry. Just wondering your thoughts on the consumer in that environment.

George Holm: That’s a hard one. QSR appears to be doing quite well. We do very little of it but it appears to be doing quite well. I think with pizza, I think that as there’s been more options for the consumer. They’ve consumed less pizza. I think there was — or the term pizza fatigue but there was — they did so well through the COVID period of time. So I probably don’t have a real good answer for you on that. I guess, the way to put it is lower end consumer, we do a lot of value store business out of Vistar and that business is doing well and we’d probably be doing a lot better, if there was more product availability. So that is a sign that people are kind of going down the chain a little bit. So I would guess, I would call it mixed.

Peter Saleh: Appreciate that. And just a housekeeping question here. I think you mentioned Foodservice inflation was about 9.6%. And — can you give us that number, what it was last year at this time and maybe on a 3-year basis, that would be helpful.

George Holm: Yes. We don’t have that number. We can get it and have Bill get that to you. But I would want to comment that, that was what we did last quarter and that we have seen a pretty significant deceleration in the last 5 weeks since the end of that quarter in food service.

Operator: We’ll take our next question from Fred Wightman with Wolfe Research.

Fred Wightman: I just wanted to come back to some of the cost benefits that you guys highlighted from the lower temporary workers. And over time, if we go back and look at some of the prior disclosures that you’ve provided about some of those onetime costs. Were those numbers only the temporary labor force or was that the combination of the temp labor force and the higher over time?

Patrick Hatcher: Yes. Thanks, Fred. This is Patrick. Those comments, those prior comments are really around the temp labor force and we were just highlighting because they’re unusual.

Fred Wightman: Okay. And then as we just think about the sequencing of those potential benefits going forward. If we look in 4Q of last year, you guys have started highlighting year-over-year benefits from lower temp workers. So how does that sort of piece together with the ability for some of these lower costs to offset some of those inventory gains or the headwinds from lower inventory gains that you’re facing here for the rest of the year?

Patrick Hatcher: Yes. I think the best way to think about it is, I think we have said that a lot of that temp labor has come out of the system. What we’re focusing mostly now on is the overtime, that we still have in the system which is, again, just a function of us being able to hire enough workers and retain those workers. The productivity improvement that we’re still really looking to see the biggest benefit from is the efficiency that you gain once you had an employee in their role for a little bit of time and they really start to generate some good efficiencies in that role. So that’s the next step and that’s what we’re looking towards.

Fred Wightman: Perfect. And then just lastly, you touched on the private label penetration and independent specifically but what is the outlook for that penetration, just given easing inflation and then also some of the higher fill rates that you’re seeing from your vendors? Do you think that will hold steady? Can it continue to grow? Or maybe you guys are not penetrating that because of costs? Like what is driving that, I guess?

George Holm: Yes. That’s the good question but a hard question. We have a handful of OpCos, who are in the 60% or over 60%, low 60s. So I guess I could say that that’s a possibility but I will admit that I didn’t see us being at 51.9% now. One of the things that has definitely helped us — we keep track of our inbound fill rate for our brands and our total inbound fill rate and our inbound fill rate was significantly better, all the way through COVID on our brands, our suppliers really stepped up. So as the other suppliers have better fill rates, will that affect it. And I got to tell you, I really don’t know. I think what I would say to you is that I’m really pleased with the percentage of our business that’s our brand. We certainly like selling product that isn’t our brand as well and that can be quite profitable for us.

You kind of develop a better sense of loyalty but it’s a customer that matters. But when they provide you much better inbound service than, I guess, the other guy, I think it’s going to continue to grow for us. I don’t know that we’ll have kind of the outsized growth that we’ve had the last few years.

Operator: And we’ll take our last question from Lauren Silberman with Credit Suisse.

Lauren Silberman: Just a follow-up on the Foodservice inflation as a different way. Is your total cost basis staying relatively steady, while year-over-year is moderating? Or are you seeing that total cost basis declining as well?

George Holm: It’s moderating. It’s not — it’s still elevated but it’s really moderating.

Lauren Silberman: Okay, got it. And then just a follow-up on the independent customers. So under the new customer acquisition is really the focus area. I mean how much — how important is new restaurant openings for your customer acquisition goals? Is there really enough opportunity and large enough addressable market in relationships that you don’t have currently that year-over-year positive unit growth in the restaurant space isn’t as important.

George Holm: Yes. We don’t track that, unfortunately, probably should. I think it’s probably been new customers has probably been more important in the last year, certainly as you think about these buildings there, for the most part, single-purpose buildings. And if somebody went out of business, it would be rare to see somebody other than another restaurant come into that building. So I would say, it’s probably been more important in the last year. But the rate at which you really need to grow your new customers to put the growth out that you need, you have to get existing restaurants on board. I think that’s really important. I wish, I had better numbers for you but we just don’t track it separately.

Operator: It appears that we have no further questions at this time. I will now turn the program back over to Bill Marshall for any additional or closing remarks.

Bill Marshall: Thank you for joining our call today. If you have any follow-up questions, please contact us at Investor Relations.

Operator: That concludes today’s teleconference. Thank you for your participation. You may now disconnect.