Performance Food Group Company (NYSE:PFGC) Q2 2024 Earnings Call Transcript

Performance Food Group Company (NYSE:PFGC) Q2 2024 Earnings Call Transcript February 7, 2024

Performance Food Group Company misses on earnings expectations. Reported EPS is $0.9 EPS, expectations were $0.92. Performance Food Group Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to PFG’s Fiscal Year Q2 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.

William S. 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 second 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 are comparing results to the results 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 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 excited to share our fiscal second quarter 2024 results with you today, which were strong and accelerated into the close of the calendar year. Building on a strong start to our fiscal year, second quarter results came in at the high-end of the expectations we announced three months ago. Once again, we saw broad strength across our business units with strong momentum in our high margin focus areas. This morning, I will review our business performance and discuss some recent trends we have seen in the market. Patrick, will review our financial performance and outlook for the remainder of the fiscal year. Then we look forward to taking your questions.

Last quarter, we discussed our strategic focus on being a leader in the food-away-from-home industry with broad exposure to a variety of channels and products. We believe that our position in the market produces consistent growth across our top and bottom lines and provides resiliency during different economic conditions. The second quarter was an excellent example of this with each of our business segments contributing to our performance. Let’s begin with our Foodservice segment. We are pleased with how Foodservice continues to perform with accelerating case volume growth across both independent and chain restaurants. The outstanding case performance drove sales growth in the quarter despite another period of modest deflation. We’ll provide more detail about our inflation expectations in a moment.

Independent case volume accelerated from the fiscal first quarter, growing 8.7% year-over-year in the second quarter due to a very strong finish and favorable calendar. We have consistently grown our market share in the independent restaurant space, which remains an important component of our long-term profit growth aspirations. The increased headcount within our sales force is certainly an important factor. However, I cannot overstate the quality of these individuals and the hard work they contribute to PFG everyday. Their performance is supported by our Company’s rigorous training, emphasis on product knowledge and the development of relationships. PFG has been building and maintaining this area of our business for decades. In our view, this emphasis is a key driver of our independent performance, and we expect this to provide continued momentum in the quarters ahead.

As we have discussed on the past several earnings calls, new account growth has been the main driver of case growth in the independent channel. This largely continued in the fiscal second quarter with active independent customers increasing by nearly 8% over the prior year. However, we did begin to see improved penetration within existing accounts, particularly in November and December. In fact, sales to existing customers increased more in December on a year-over-year basis than we have seen since January of last year. We are optimistic that growing business with our existing customers will become a more important piece of our case growth trends. Last quarter, we highlighted the sequential performance of our Chain business, and we’re optimistic that we could see positive case growth over the next several quarters.

We are pleased to see that Chain business continue to accelerate sequentially, swinging to positive case growth in the fiscal second quarter. The growth in our Chain business was mostly driven by improved performance of our existing customers with a small contribution from new accounts. As you are aware, we have produced several excellent results in our Foodservice business despite several quarters of deflationary pressure. Sequentially, deflationary moderated in the fiscal second quarter compared to the fiscal first quarter as we had expected. While the moderation was slightly less than we had originally anticipated, our strong case performance and positive mix shift offset the deflationary pressure, resulting in gross profit improvement in the quarter.

As we turn our attention to the back half of 2024, we continue to expect moderating deflation turned very slight inflation by the time we reach the end of the fiscal year. We are extremely proud of how our Foodservice business has performed I believe it will continue to be the engine for our profit growth over time. Turning to Vistar, we were very pleased with results in the fiscal second quarter. Vistar is an important growth engine for our Company and has consistently produced strong top and bottom line results. As we discussed on last quarter’s earnings call, Vistar did have a difficult comparison in the fiscal second quarter due to higher than typical inventory holding games last year. They were able to successfully overcome this hurdle and grow bottom line results in the period.

One of Vistar’s strength is the ability to compete in a wide variety of channels selling a broad range of products. This diversity helped once again in fiscal second quarter, allowing the segment to produce high-single-digit sales growth. Vistar saw particularly strong sales results in the important vending office coffee and office supply channels. One of the key drivers of the top line performance was a continued improvement of fill rates, both inbound and outbound. As you may remember, Vistar’s fill rates have been slower to recover than our Foodservice business, and we are pleased to see gains in this area recently. Vistar has continued to enhance their ecommerce platform, which we believe will offer further growth potential in this channel enable us to increase sales to existing customers as well as open new lines of business directly to consumers.

Vistar has a strong pipeline of new business, and we are excited about the future. Finally, our Convenience business has powered through a difficult macroeconomic environment to produce very strong bottom line results. On the topline, our Core-Mark operations continue to win new business and outperform the broader c-score landscape, particularly in the largest and most important channels. And particularly, Core-Mark has been able to outperform in the foodservice, candy and snack areas of the Convenience business. While topline growth is not quite as robust as we might like, Core-Mark has shown their ability to win market and take share from competition. We believe that inflationary pressure, both inside the convenience store and the gas pump has kept consumer demand muted over the past several quarters.

Over time, we expect this to normalize and allow top line trends to revert to historic growth rates in the convenience space. Meanwhile, Core-Mark has done an outstanding job capturing efficiencies on the operating income line, particularly in workforce productivity. Core-Mark’s operating expense efficiencies are attributed to record low temporary workers and overtime expense, which has decreased by approximately half from Q2 of 2023. A stable full-time workforce has several long-term advantages including fewer picking errors, lower levels of shrink, and higher worker productivity. As a result of these efficiencies, the Convenience segment experienced 20% adjusted EBITDA growth in the quarter. This profit performance is despite lower inventory holding gains on a year-over-year basis.

Through the remainder of fiscal 2024, we anticipate inventory holding gains to moderate to a normal level. Still, our Convenience segment’s profit momentum is strong due to the excellent management of underlying cost items. Core-Mark’s ability to deliver both traditional convenience store goods as well as broad line foodservice expertise and capabilities has enabled us to capture additional business opportunities since the acquisition. We have expanded our capabilities to incorporate additional branded concepts, including various cuisine types, such as Hispanic fried chicken and barbecue. We have used the strong brand equity in several of our performance brands, including Contigo, Perfectly Southern Fried Chicken, Red Seal Pizza, and Tru-Q Barbecue.

We believe that these programs help to drive our strong sales pipeline and expect them to result in additional business in years ahead. Before turning to Patrick, who will discuss our results and specific drivers for our performance and then provide more color on our guidance for 2024 and beyond, I want to leave you with a few key messages from our second quarter results and expectations for the future. We believe that PFG’s position as a leader in the growing food-away-from-home market will enable us to consistently grow our sales and profit over the long-term, resulting in additional shareholder value. Our commitment to invest in new fiscal capacity and customer facing employees has produced market share gains in the highly profitable channels in which we compete.

Our broad channel exposure gives us access to significant white space opportunities that we believe insulates our business from changes in the external macroeconomic climate. We are excited for what the future holds and appreciate your interest. I will now turn it over to, Patrick.

Patrick Hatcher: Thank you, George, and good morning, everyone. I’d like to start this morning by reviewing our performance for the fiscal second quarter of 2024 and commenting on PFG’s financial position and capital allocation priorities. I’ll then review our outlook for the remainder of fiscal 2024 and discuss some key drivers embedded in our guidance. We’ll then be happy to take any questions you have during the Q&A portion of the call. As you saw in our press release this morning, PFG delivered strong results during the fiscal second quarter. Building on the momentum from our first quarter, we were particularly pleased with how we closed the calendar year during the important holiday selling season, which experienced accelerated growth.

In the fiscal second quarter of 2024, PFG generated total net sales of $14.3 billion, a 2.9% increase year-over-year. Our revenue was at the upper-end of the guidance range we laid out last quarter, and we are very pleased with this result. Our sales performance was driven by a 2.1% increase in total case volume growth. Our case performance was boosted by an acceleration independent restaurant case growth, which increased 8.7% in the quarter. This result was more than a full percentage point higher than the prior two fiscal quarters, highlighting the solid momentum in this area of our business. As George mentioned, we attribute this strength and resulting market share gains to our investment in our growing outstanding sales force. I’m also pleased to report that case volume to chain restaurants grew in the fiscal quarter after several consecutive quarters of decline.

As we discussed in our last earnings call, our chain performance had improved sequentially as a result of improvements in some of our key accounts and new business wins. It is rewarding to see this area of our business move back towards positive growth, creating a powerful combination with our independent strength. We expect to continue to add new accounts to our Chain business, emphasizing profitability as we partner with strong and growing restaurants. Total PFG gross profit increased 6.6% in the fiscal second quarter to $1.6 billion. Positive mix shift continues to drive gross profit growth and margin expansion for PFG. While deflation in foodservice moderate in the second quarter compared to the first quarter, it remains a modest headwind.

Our gross profit performance in the quarter once again reflects our ability to produce solid profit growth despite the deflationary backdrop. Total company inflation increased slightly in this fiscal second quarter due to moderating deflation in the Foodservice segment that I just mentioned. This offset the slowing rates of year-over-year inflation at both the Vistar and Convenience segments. Total company product cost inflation was 3.6% in the fiscal second quarter, up half a percentage point sequentially from the fiscal first quarter. Deflation in the Foodservice segment moderate to 0.4% in the fiscal second quarter, compared to 2.3% deflation in the fiscal Q1. As expected, Vistar inflation continued to slowly trend lower in the quarter, though it remains elevated compared to historic norms.

Vistar finished the second quarter with inflation just below 7%. The Convenience segment is experiencing a similar dynamic with 7.5% inflation in the fiscal second quarter. Looking ahead, we continue to expect Foodservice deflation to move toward inflation by the end of the fiscal year, with Vistar and Convenience inflation settling in at a more normal low-to-mid-single-digit range. These are the assumptions in our fiscal 2024 guidance. Gross profit per case was up $0.29 in the second quarter as compared to the prior year’s period. Our ability to increase gross profit at this rate is an important factor in our bottom line growth. You will see in our earnings release, our operating expense did increase at a mid-single-digit pace in the fiscal second quarter.

This increase is mostly due to higher personnel expense and an increase in insurance costs. Higher personnel expense is partly a factor of our larger workforce to match our increase in demand. These increases were partially offset by increased productivity. We expect these improvements to continue in future periods as we steadily capture opportunities to become more efficient, particularly in the areas of warehouse and delivery. In our second quarter, PFG reported net income of $78.3 million a 10% increase year-over-year. Adjusted EBITDA increased nearly 12% to $345 million. Our adjusted EBITDA result was at the very top end of the guidance we provided last quarter. Diluted earnings per share in the fiscal second quarter was $0.50, an increase of 8.7%, while adjusted diluted earnings per share was $0.90, an 8.4% increase year-over-year.

We did see a higher effective tax rate in the fiscal second quarter of 29.9%, which is due to an increase in non-deductible expenses and state and foreign taxes as a percentage of our income. Turning to our guidance. For the fiscal third quarter of 2024, we expect net sales to be in the range of $14 billion to $14.3 billion, and adjusted EBITDA to be in a range of $310 million to $330 million. Keep in mind that fiscal third quarter is typically the smallest quarter in our fiscal year due to relatively light industry volume in January and February. A couple of thoughts on the assumptions we have applied to our fiscal third quarter outlook. First, as expected, the Foodservice segment continued to experience mild deflation in the fiscal second quarter.

We continue to expect this deflation to move towards flat during the fiscal third quarter, although the pace of this improvement maybe a bit slower than we originally anticipated. Second, while we closed out our fiscal second quarter with significant momentum, bad weather in early January resulted in an impact to our volume and sales results. Typically, January is a very small month, so we do not believe that the weather will result in a significant impact to our full third quarter. However, we are mindful of the slower start to the calendar year than we originally expected. Despite these challenges, we are reaffirming our full year fiscal 2024 guidance. We continue to expect net sales to be in the range of $59 billion to $60 billion and adjusted EBITDA to come in at the upper-end of our previously announced 1.45 billion to $1.5 billion range.

We’re currently tracking sales at the lower-end of the $59 billion to $60 billion range, though we do expect to have a strong fiscal fourth quarter. We’re also reiterating our long-term outlook which projects net sales to be in the $62 billion to $64 billion range in the fiscal 2025. Adjusted EBITDA is expected to be comfortably within the $1.5 billion to $1.7 billion range in fiscal 2025. As you can see from our outlook for the next two fiscal years, we are confident in PFG’s current trajectory and believe that our business is on solid footing. I’d like to conclude our prepared remarks today with our financial position, including our cash flow generation, balance sheet, and capital allocation priorities. Over the first six months of the fiscal 2024, PFG generates strong operating free cash flow.

Operating cash flow was $554 million in the first six months of fiscal 2024, an increase from $424.5 million over the first six months of fiscal 2023 due to improvement in our working capital and higher operating income. After investing about a $147 million in capital expenditures, PFG generated $406.9 million of free cash flow. Investing in our business remains the top priority, including growth projects to build additional capacity to support our long-term growth aspirations. After capital expenditures, we have three main uses for our additional cash flow, including M&A, leverage reduction, and share repurchases. We evaluate these decisions based upon the value we see each would create for our shareholders and strategically deploy capital towards this view.

Our share repurchase program considers the value of our stock as well as the relative evaluation compared to historic levels. In the fiscal second quarter, PFG repurchased 0.8 million shares for a total of $50 million for an average cost of $58.01 per share. We are confident in our long-term prospects and reflect this through 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 completing and integrating acquisition throughout our history. The team is continuously working to identify interesting opportunities while remaining disciplined on price and strategic fit. Finally, we have focused our efforts on maintaining a healthy balance sheet. We closed the quarter just below the midpoint of our 2.5 times to 3.5 times net debt to adjusted EBITDA target and feel very comfortable in this range.

We also carefully consider the balance between fixed rate and floating rate debt and used interest rate swaps to convert a portion of our ABL balance to a fixed rate. At the close of the fiscal second quarter of 2024, 80% of our total outstanding debt was at a fixed rate, including these swap contracts. We believe that our current level of debt provides ample flexibility to fund our ongoing operations while leaving room for the capital allocation priorities, I just highlighted. To summarize, PFG finished calendar 2023 with a strong fiscal second quarter. We believe our business is well-positioned to achieve strong results despite changes in the macroeconomic environment, and we are investing in the long-term success of our organization and our shareholders.

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 15 Best Gay Dating Sites and Apps of 2024 and 20 Best Small Towns in Florida to Retire.

Q&A Session

Operator: [Operator Instructions] And we do have our first question from Jake Bartlett with Truist Securities.

Jake Bartlett: Great. Thank you so much for taking the question. My question was on the cadence of the sales and the EBITDA guidance in the third quarter and the fourth. You mentioned weather, but you also mentioned that it wasn’t going to have very large of an impact given how small, the January is. So the question is, what gives you so much confidence that sales growth will accelerate in the fourth quarter? By my math, it’s about 6% growth at the low-end of guidance, in the fourth quarter, up from, call it, 2.5% to 3% in the third. So, what gives you confidence in that level of acceleration?

George Holm: Well, momentum in our independent business is a big help. We have new business coming in, in our national account area that, starts anywhere from the beginning of fourth quarter and some of it starts in May and the same in our Core-Mark business. We have some new business that, we’ve already signed up and we know is coming in. So, those are the things that give us confidence as we get into the fourth quarter.

Jake Bartlett: Okay.

George Holm: And Jake

Jake Bartlett: And then, sure. Thanks.

Patrick Hatcher: Oh, sorry. I was just going to add, what we’re really trying to do is make sure that we give you guys some clarity on the cadence of Q3 to Q4.

Jake Bartlett: Got it. But the third quarter is impacted by weather but not by much. Is there any way you can kind of quantify how much just you’ve seen in January, it’s done? How much of an impact do you think January was to the quarter as a whole?

George Holm: Well, January was a significant impact. I mean, it was a slow month. We’re glad to be doing this quarter having, a week in February under our belt, once we got past the bad weather, which is really just California now, things were right back to normal, and our case growth was back to normal. So, we’ve got nine weeks to make up for a difficult four weeks, but, we want to communicate that does have an impact on our third quarter. But, March is so critical to Q3 that, we don’t have full insight into what impact it would have on us. January is always a low EBITDA month for us.

Jake Bartlett: Great. I appreciate it. I’ll pass it on. Thank you.

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

Mark Carden: Great. Thanks so much for taking the question. So, I wanted to dig into Convenience a bit. You mentioned that you’re taking share there both overall and in Foodservice, still cases in Convenience Foodservice were down. I’m curious if this would have been positive if you include the Foodservice sales that are embedded within your performance Foodservice business? And then —

George Holm: Yes. It would have been a 6.3% case increase, if you, include the foodservice.

Mark Carden: 6.3?

George Holm: Yes.

Mark Carden: Okay. Great. Are you seeing much of a change in consumer behavior as gas prices have moderated a bit?

George Holm: I think it’s too early to tell with that because it’s pretty recent that it’s, we’ve had that moderation, and we’ve had the weather component to deal with there. At least, if you look at it historically, we’re going to see some positive impact from that. Where we’re seeing, the softness is one large account, that is very soft. And, the Monday and Friday morning traffic is still not quite, back to normal. I think it’s because a lot of people aren’t working five day week or going into the office for all five days. But other than that, we see some good success. And then, it has a long sales cycle, which I’ve mentioned several times, Convenience in general. But in the Foodservice where there are branded programs, those are typically fairly long contractual arrangements, so maybe three years and maybe five years.

So, with our turnkey programs that I mentioned in the prepared remarks, our Perfectly Southern Chicken or Tru-Q Barbecue, those type of programs. Were they’re not doing something like that, we get in quick, were they have to change out signage and they’re doing that with somebody else who maybe had a three or five year agreement, sometimes those are going to be six months, 12 months before they’re actually up and gone. But what we do is we keep track every month of how many new programs that we’ve signed up, and, we just feel real good there. Even the month of January where it was difficult to get those things done, we did sign up, significant amount of customers. So our Foodservice business, and the Convenience, we’re real pleased with where we’re at this stage.

Mark Carden: Okay. Great. And then as a follow-up, just you talked a bit about the potential for strategic M&A. You mentioned recently that Foodservice would likely be the primary focus there. Just anything that you’ve seen recently that would make you any more or less optimistic about the volume of potential deals. And then if you did add within Foodservice, did you have any order of preference just between bolt-ons, category additions or white space or is it simply what’s going to have the highest return?

George Holm: Yes. Well, we’re always looking at white space. That’s important to us. We’ve spent a lot of time on capacity in the West Coast or the whole west, actually. If you look at our Company from a broad line standpoint, west of the Mississippi, we really only have one, and that’s in Northern California, and that’s actually our smallest broad liner in the country. So, when we get our monthly share information, which we think is fairly accurate, and it’s got all the large players. Our shares are very low in the west and very high in the east and continue to get better in the east. So, we need that capacity in the west, and we’re adding capacity as opposed to acquisitions where we feel like maybe acquisitions won’t be available. And there’s other, potential ones that we have. We don’t really look at bolt-ons or hold-ins. It’s just not something that makes a lot of sense for us right now.

Mark Carden: Got it. That make sense. All right. Thanks so much, and good luck guys.

George Holm: Thanks.

Operator: And we do have our next question from Edward Kelly with Wells Fargo.

Edward Kelly: Hi. Good morning, guys. George, maybe could we start on the independent side? I mean, obviously, you saw a nice acceleration in independent case growth. Strategy is clearly working there. It does seem like there’s a good competitive backdrop as maybe intensifying a bit just from the standpoint of the amount of focus there is on driving independent case growth. Can you just talk about what you’re seeing competitively? And then looking forward, how do we think about the right pace of growth for this business for you over time? I think it was in 2019 you talked about 6% to 10% growth that was kind of a target for a long time. Is that a reasonable target as we think about the coming couple of years. Just thoughts there would be great? Thank you.

George Holm: Yes. We’ll start with the competitive nature of the business. I think it’s always been very competitive and independent. I’ve never seen the time where it wasn’t. As far as being more competitive than normal, I don’t really hear that from our people. So, I would just say that it’s a very competitive business and it’s as competitive as ever right now, but not necessarily more so. As far as pace of growth, I think the 6% to 10% is something that we still want to hang our hat on. We’re doing that right now with, in excess of 7% new customers, and we’re doing it with about an 8% increase in salespeople. And we’re starting to lap last year when we got that busy post-COVID adding sales people. So, that number is probably going to come down as far as year-over-year.

But as these people have, gained more experience, they’re doing better, and we look to having a higher case growth than we have growth in sales people. But 6% to 10% is still something that, it’s ingrained in our people. And we’re not at a point where we want to back off from that.

Edward Kelly: And just as a follow-up, you mentioned this in the Convenience business, this notion of elasticity and the demand disruption that’s caused by the inflation. And I have to imagine that we’ve seen that probably across business, there’s been a lot of pricing in all of these businesses. Pricing is easing generally. Do you think that the industry has an upcoming benefit coming from, let’s call it, like normalization of underlying demand as inflationary pressures normalize? You’ve been putting up very solid growth, obviously, in a backdrop where I don’t think the industry is growing very much.

George Holm: Well, we see that in the share reports that we get, and that’s what gives us confidence going forward, is we’re doing a better and better job of gaining share. I mean, it’s, a tenth or two-tenths more than, say, the previous increase in share that we had the previous year, but that’s a lot, and it is through the size that we are. And with shares, I guess, to a degree as low as ours are. As far as pricing goes, I think a lot of people overshot with the pricing and to some degree, I don’t blame them. They were facing, a lot of issues with food inflation and not just food, but, rents going up, utilities going up. I mean, everything was going up. What we’re seeing now is a lot of people are not backing off on their menu prices, but there’s just a lot of promotional activity that’s going on.