Performance Food Group Company

Stand by, your program is about to begin. Should you need audio assistance during today's program, please press star zero. Good day and welcome to PFT's fiscal year. q3 2022 earnings conference call if you would like to ask a question at the conclusion of the prepared remarks please press the star key followed by the number one on your telephone keypad at any time i would now like to turn the call over to bill marshall vice president investor relations for pft please go ahead sir

Thank you and good morning. We're here with George Holm, PFG CEO, and Jim Hope, PFG CFO. We issued a press release regarding our 2022 fiscal third quarter and first nine months 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 2021 fiscal third quarter. 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. 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 statement 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.

Thanks, Bill. Good morning, everyone, and thank you for joining our call today. I'm pleased to speak with you this morning to share another stellar quarter for PFG as business results across our organization continue to outpace our expectations. Our physical third quarter results were once again boosted by success in the independent restaurant channel, steady business wins in the convenience space, and consistent improvement in Vistar's channels. We were also pleased with a notable improvement count.

Our journey to becoming a unique leader across a variety of channels and product offerings continues.

At the end of June, we will host an Investor Day at the Cormark offices in Westlake, Texas. That meeting will provide an opportunity to have a deep discussion on PFT's strategic direction, including the collaboration being achieved across our three segments. We are excited to show you the Cormark facilities and give you an opportunity to hear from our leadership team. PFT's clear vision is already producing results as new business wins in convenience food service and VISTAR, are being achieved with the breadth and depth of products and services our company can offer a range of customers. Each of our companies has worked hard to expand our addressable market while maintaining our commitment to existing lines of business. The result is a powerful story of organic success augmented with strategic expansion into new lines of business to drive long-term sales and adjusted EBITDA growth. As you can see from our fiscal third quarter results, We have solid momentum along this path, posting net sales at the top end of our guidance range and higher than anticipated adjusted EBITDA margins. Top line results in April have been consistently strong. This has allowed us to increase our outlook for the full year, and we now believe $1 billion of adjusted EBITDA is possible for fiscal 2022, even with just 10 months of core March results. This morning, I will discuss a few notable areas that drove this success, and then Jim will add some financial color. We'll close by taking your questions. Starting with our food service segment, strong sales and EBITDA growth were led by independent case growth. Total independent organic cases were up 13.7% in the quarter as we continue to win business. In fact, in the quarter, we added approximately 4,500 new independent accounts and the number of active independent accounts increased by a double-digit percentage compared to the third quarter of last year. This was a significant acceleration from the second quarter. We also saw record levels of performance brand penetration within independents, another important driver of margin expansion and EBITDA growth for our broad-line business. Our differentiated, high-quality brands continue to provide great growth, as restaurant operators look to provide quality to consumers, particularly during the time of high inflation. We began to integrate merchants, which we acquired at the very end of the calendar year. While merchants will take a few quarters to build to a full run rate of EBITDA contribution, we are very pleased with the early integration progress and believe this will prove to be another excellent acquisition for our company. Before moving on to our convenience segment, I want to speak to the inflation situation. As you know, inflation has been persistent throughout the fiscal year and accelerated in the third quarter. In fact, our food service segment experienced nearly 20% food cost inflation in the quarter, kicking sequentially higher compared to the prior two quarters. We are encouraged by the fact that we have been able to pass along these higher costs and just not seem to be resulting in significant demand destruction. Consumers appear willing to accept the higher menu prices particularly as inflation is broad and not disproportionately impacting food away from home. Still, this is something to closely monitor across the next few months and quarters. Moving on to our convenience segment, when we closed the Coremark transaction, we had high expectations and expected quick progress, not only on integration, but for a new business opportunity. I'm very pleased to say that our expectations have been met and even exceeded in many ways. You can see this play out in our sales and EBITDA progress for the convenience segment. We described a few instances of new wins in the convenience arena. We have begun to ship to these new accounts and early progress is encouraging. We're also excited that new opportunities arise regularly and with a strong pipeline of new business that we expect to add over the coming quarters and years. As our pipeline of new business grows, we expect to see margins in the convenience segment improve. There are many factors underpinning this improvement, including early synergy capture and tight cost control management. But there are also healthy signs of growth in the food and food service area with inconvenience. As one enterprise, PFG can provide products and services that we believe will make us a preferred supplier to the convenience operator. Our ability to provide expanded food product selection and cost efficiencies, along with our expertise in the food space, are a few of our many strategic advantages. We strongly believe that our umbrella platform gives us a leg up compared to the competition in the convenience arena. To provide insight into our convenience store strategy, we are providing additional information showcasing sales progress. To achieve this, we have identified two distinct buckets of products that we sell into the C-Store channel through Cormark, E.B.

Brown, and food service business. Food service and related products include goods, including candy, snacks, beverages, coffee, as well as any food-related packaging or equipment.

Essentially, these products reflect everything we sell to convenience customers, excluding all tobacco products. These sales may be captured within the convenience segment or within the food service segment, depending on which operating company makes the delivery.

The second category, nicotine products, encompasses all cigarettes, cigarettes, smokeless,

bait, oral nicotine, and other tobacco-related products. Only our convenience operating companies deliver tobacco products. As we have discussed in the past, our focus is growing the food, food service, and related product categories into convenience, which we believe will be a significant driver of sales, profit, and shareholder value derived from the Cormark transaction. In the fiscal third quarter, net sales from food, food service and related products increased approximately 21.5%. This is compared to a 1.9% decline in all nicotine product sales. This produced a positive product mix for PFG. As you can tell, we are extremely pleased with the quick progress we have made in the convenience space. This could not be possible without a smooth integration process, which has continued to track on, or in some cases, ahead of expectations. We're excited to share a deeper look into our convenience strategy at the Cormark headquarters in late June. This will be an opportunity for the investment community to engage with our leadership across the organization and see the strong collaboration we have fostered among all our segments. Finally, a few words on our Vistar business, which has made significant strides over the past several quarters and is well on its way toward a full recovery. Over the past several quarters, we have discussed how discharge recovery would likely be slower than the rest of our business due to exposure to the hardest-hit channels that we serve. While that has largely played out, we are encouraged by the recent progress, particularly in the theater business. We are also optimistic that a slow return-to-work trend could provide a tailwind to our office coffee business in the months ahead. With that said, the office landscape will likely look different in the future, and we need to adapt to the new structure of the work environment. As markets continue to improve, the inflationary environment has also helped Vistar achieve sales and profit growth. In fact, for the last two quarters, Vistar's EBITDA margin has held steady and approximately in line with peak pre-pandemic levels. There are also a number of exciting growth opportunities at Vistar, including the retail automation network we have highlighted in the past. Operations at our three facilities are fully open and continue to bring on new customers. We are pleased to report that in recent months, each of the facilities has achieved mid to high single-digit EBITDA margins, a rate of profit improvement that is outpacing our original expectations. We believe this bodes extremely well for the long-term potential of this initiative. Our long-term outlook for Vistar is very positive as legacy channels are showing a clear path to recovery and new lines of business are nicely adding to our sales and profit growth. Before turning it over to Jim, I wanted to touch on our ESG program, which has been an important initiative for our organization. During the fiscal third quarter, we published our second annual ESG report and for the first time set long-term goals for our company. This included objectives to reduce power consumption intensity by 20 percent, increase the diversion rate for operational waste by 80 percent, and increase purchases with women, veteran, and minority-owned businesses by 25 percent, all by the year 2030. Furthermore, in April, we announced the introduction of 10 net-zero emission refrigerated trailers to our fleet at our Gilroy, California, distribution center. Steps like this are important progress in our company's ongoing journey towards being an ESG leader in our industry. To summarize, all three of our operating segments have made significant progress over the past three months and maintained strong momentum into the spring and summer. We have managed the labor market well, which has helped our margin profile and eased some supply chain challenges, which has allowed us to improve our service levels to customers. Our independent restaurant business posted double-digit organic case growth, increasing market share, and driving profit growth. Our convenience business has exceeded our high expectations with a smooth integration and steady business wins. And Vistar has shown steady improvement and is generating high margins, which should continue to be a tailwind to our earnings growth going forward. I'd now like to turn it over to Jim, who will review our financial position and earnings results in more detail. Jim? Thank you, George, and good morning, everyone. As George discussed earlier, our business results have continued to improve, which continues to solidify our financial position. This morning, I'd like to discuss our cash flow and balance sheet positioning before turning to a brief overview of our business results and discussion of the operating environment. I'll finish with our updated guidance, and then we'll be happy to take your questions. PFG experienced strong operating cash flow and free cash flow in the fiscal third quarter and the first nine months. Operating cash flow over the first nine months of the fiscal year was about $391 million as we generated approximately $237 million of operating cash flow in the fiscal third quarter. Improvements in working capital added to our strong underlying profit performance. Our free cash flow, which we define as cash generated from operations less capex, was about $250 million over the first nine months and was about $165 million in the fiscal third quarter. We used additional cash flow to pay down our ABL and closed the quarter with approximately $4.2 billion of total debt, including finance lease exposure at a weighted average interest expense of 3.9%. Total company leverage is now 4.2 times our trailing 12-month adjusted EBITDA, including core mark for the entire period. We are committed to paying down our debt in the absence of strategic M&A opportunities. Our total liquidity position remains strong at $2.4 billion. We believe that our liquidity provides plenty of flexibility to invest in the business at attractive financing levels. With that, let's quickly review some highlights from our fiscal third quarter business performance. As a reminder, last quarter we increased our reporting segments from two to three, now reporting on food service, convenience, and Vistar. At a total PFG enterprise level, net sales increased 82% in the quarter to $13.1 billion, driven by the addition of core mark, inflation, and a continued recovery in the business environment. Total case volume increased 35.3% in the third quarter and was up 8.3% excluding the contribution from Cormark and merchants. Organic independent cases increased 13.7% in the fiscal third quarter as we continue to see solid momentum in our independent business. Total BFG gross profit increased 61.6% compared to the prior year quarter, including the addition of the Cormark business and the independent case growth, which I just mentioned. Cormark contributed $243 million in gross profit during the fiscal third quarter. Food cost inflation continued to move higher in the quarter. Our weighted cost inflation was 13.6% up sequentially as we continue to experience double-digit increase in our food service commodities. Food service segment food cost inflation approached 20% in the fiscal third quarter. We have continued to successfully pass along these increases. Gross profit per case was up about $1 in the third quarter compared to the prior year period. We continue to make progress on the labor front in our efforts to reduce temporary and contract workers. As we disclosed in the press release this morning, our temporary contract labor costs increased $16 million compared to the prior year period, which includes both direct contract labor costs and associated travel costs. This was another sequential step down compared to the prior quarter when contract labor costs were up $34 million over the prior year. As we've discussed through the year, we will not see the full benefit of those cost reductions immediately as a reduction in temporary workers is largely replaced by full-time associates. However, over time, we should realize savings from these initiatives as full-time worker productivity increases. We are pleased to see consistent improvement in the labor situation to date, though we expect the pace of lower temporary labor costs to begin to flatten as we reach a steady state of operations. In the third quarter, PFG reported net income of $23.4 million. Adjusted EBITDA increased 96.3% to $237.9 million. Diluted earnings per share was about 15 cents in the third quarter, while adjusted diluted earnings per share was 51 cents. Our EPS results were impacted by a higher tax rate compared to the second quarter, mostly due to a decrease in deductible discrete items related to stock-based compensation. Based on our strong third quarter results and positive outlook for the fourth quarter, today we adjusted our full year guidance. We are raising the bottom end of our full year sales guidance by $500 million and now look for total net sales to be in a $50.5 to $51 billion range. For adjusted EBITDA, we are raising the top and bottom end of the range and now anticipate $990 million to $1 billion, a $20 million increase on the bottom end and a $10 million increase on the top end compared to our prior guidance. In summary, we're extremely pleased with our quarterly and year-to-date financial results. We posted a strong quarter, and we expect the momentum to continue in the fourth quarter. This is reflected in a better outlook for our full-year guidance, particularly on adjusted EBITDA, showing our strong commitment to margin improvement. Our company is positioned to build on our strengths, driven by our consistent focus on our existing customer base while adding high-profit new accounts across channels. The Cormark integration has proceeded very well, both culturally and from a business perspective. Our balance sheet remains strong, providing flexibility to invest in value-creating projects to drive organic growth. We believe these factors will allow us to achieve our three main objectives, sustained profitable sales growth, EBITDA margin expansion, and debt pay down. We appreciate your interest in Performance Food Group, and with that, we'd be happy to take your questions.

At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. To remove yourself from the queue, press the pound key. Once again, that is star and 1 to ask a question. And we will take our first question from Alex Dago with Jefferies.

Good morning. Thanks. I wanted to dive into the recent convenience food service sales trends and other non-cigarette categories, and it looks like it was very strong in the quarter overall. I'm just kind of curious how they're impacted by the higher fuel costs. Do you have any more recent observations of how the C-store operators are responding to perhaps any changing consumer habits with the elevated gas prices in the convenience world?

Yeah, this is George. You know, typically what people with experience that are in the convenience business is when fuel is high, it tends to have a negative impact on the consumption or the purchases of nicotine products, but not so much the other items. Many people, when they go to fuel to get fuel, they don't fill their tank. They only buy $20 or $30 nicotine. uh you know they have their number of fuel and they tend to then go to convenience stores more frequently and that frequency tends to help in in uh you know some of the uh food areas particularly the more competitively priced areas interesting thanks um and then just on inflation following up if there's

Do you see anything into the fiscal fourth quarter, any pockets of sequential softening on inflation, and just an idea of what you're baking into your expectations in the sales specimen?

Yeah, this is Jim. Overall, we expect a new plan for continued inflation. Our organization is prepared to handle it. We believe we've done a very good job, and our team across the organization has done a very good job managing through inflation. So we think we'll continue to see it at the product level, and we'll continue to see it at the operating cost level. Something similar to what we've seen in Q3, though there may be signs that we could see shortly where it begins to abate, but I don't think that will be materialized.

Got it. Thank you.

And we will take our next question from Jake Bartlett. What true securities? Your line is open.

Great. Thanks for taking the questions. My first was just on the staffing situation. It's great to see the use of temporary labor coming down those related costs. Can you talk about how close you are now to your kind of pre-COVID kind of normal levels of staffing? Is there maybe a percent kind of that you have to improve to, how you gauge how far you are back to normal?

Yeah, in general, we are definitely trending towards being back to normal, and we'd expect that to occur towards the very end of Q4. It's consistent with what we had expected and hoped for when we started the fiscal year and talked about it in Q1 and first disclosed our information early on in the year. So our operators have done an exceptional job, and everyone in the supply chain, in learning how to manage through this difficult time. And now they've gotten it to where we're in a much better shape and the outlook that we have for the future is very upbeat on that front. We also started to see slight improvements in overtime. I want to be thoughtful in that comment. Our supply chain is still working very, very hard. It's not an easy time for them, and the work they're doing is important, and we expect it to continue.

But, you know, as it gets closer to steady state, it's just not going to be able to improve as much as it has been. The pace of improvement will moderate.

Great. That's helpful. My next question is just on the chain business. You know, I know maybe an update there. I know as of the last call, you're kind of running ad accounts. I'm wondering how that looks today, whether you're potentially going to be more aggressive or in a position to be in terms of trying to get, you know, incremental chain business.

Well, you know, we continue to have problems in some markets from a service level standpoint. What has been really encouraging for us is that we see nice increase in our number of customers where we got service levels back to kind of pre-COVID levels. As far as the national account part goes, we are still running in cases behind 2019. where last year we did surpass 2019 in independent, and this year we've built on that increase from last year. We're not in a position yet where we're going to be real aggressive to get that type of business. Our day will come when our service levels are better. Also, we're in such a high inflationary period of time, and And we've been able to hold pretty steady with margins because of the change in our mix of business. As we've continued to grow our independent faster in the convenience business, we've continued to grow the independent faster and also, you know, obviously a huge difference between our areas of concentration in the food area versus nicotine.

When it comes to Vistar, we really have made great progress. Great strides from the service standpoint. Our margins in the health, once again, by mix, as theater.

It's a lower gross margin area, as is office coffee, driven a lot by just the total case price of the product. So, you know, we feel real comfortable around our sales growth number right now. April was an exceptionally strong month for us. So I think that we'll continue along the path that we are. When our service levels are really in place, we have a great feel for what our cost to do business will be in the future. We'll get more aggressive from a national account standpoint.

Great. Thank you very much.

We'll take our next question from John Highbuckle with Guggenheim. Your line is open.

So I want to start with the 22% increase in the C-Store food revenue. You know, how organic is that, meaning sort of being helped by still recovery from COVID and, you know, chunky new business? You know, what do you think is a good sustainable growth rate, you know, longer term, you know, The high single digit, is that doable?

First of all, it's all organic from the standpoint that we have the pro forma core mark numbers in that previous year number. I'm not real comfortable about if that's sustainable or not. Obviously, we've got some good early wins. I don't see any reason what's sustainable. in that food area.

Focus before being right. See stores probably the biggest focus for them inside the box. One of the biggest focuses is prepared food, right? And you know, some of them do a good job. Many of them don't. So when you think about your ability right to message your expertise and actually begin to impact their business, How long do you think that will take, right, in terms of product development and, you know, your marketing, your capabilities?

I think we've already done a good job as far as product development goes. We certainly have some voids. We've learned a lot. It is a different food service market than a restaurant. Actually, some of our early wins started on these turnkey type programs with more food and service customers and ghost kitchens and places like that. But we've learned a lot. I think we're ready to go there.

I think it comes down to our ability to market the product and making these decisions which seem to be different for every account, no surprise.

as to where we deliver that product from. But I think our offering is more important, our level of competitiveness, the quality of it, than where we deliver it from. But, you know, we're learning as we go along. And that's part of, John, why we're so encouraged, because we are learning a lot. You know, we're making a mistake here and there, and yet we're doing very well.

All right, and then just lastly, you're not yet seeing any impact on demand from inflation. You've done this a long time, George. Do you have any thought, you know, when that might materialize? And, you know, I know the pizza Italian business held up really well during COVID for a lot of reasons. Is there anything you're seeing that would suggest, you know, people may be shifting, you know, from higher cost dining out to lower cost or not yet?

I'm not seeing that yet. I'm a, needless to say, frequent dine-out person, and I'm seeing the higher end and steakhouses appear to be doing really well. With pizza, we were certainly down from a growth standpoint this last quarter from where we had been. I was starting to develop a little bit of concern with it. We're still high single-digit case growth. But then I looked at the big three when they put their numbers out, the big three pizza chains, and, you know, they were somewhere between 6% negative and 1.9% positive from the same store sales standpoint. And then, you know, we get some limited reporting on share. It doesn't include a lot of the specialty guys, so maybe in pizza it's not as accurate as in some other parts of the business. But our share gains were actually better than they had been in the past at lower growth. So that does show me there's a little bit of pizza fatigue out there. There are a lot of other options for people dining out. But we just have not seen any demand destruction. And, you know, you made the comment I've been at it a long time, and I have, but I've never quite seen this type of situation. I do have a little bit of a concern that menu price increases have not caught up with what our customers have experienced from price increases. But it just doesn't seem like anything really impacts the consumer today. As a matter of fact, I would go so far, John, as to say the bigger issue we have right now is staffing at the restaurant level where – You know, they just don't take enough reservations to fill their restaurant because of their concern about being able to service the customer. Thank you. Thanks, Jim.

We will take our next question from Edward Kelly with Wells Fargo. Your line is open.

Hi, guys. Good morning. George, you mentioned an exceptionally strong April. I was hoping, could you provide just a bit more color on what you're seeing, you know, currently, you know, including maybe some detail on customer type. And is there a way to frame it, you know, from like a number standpoint? I mean, are you now, you know, running above 2019 in total organic case volumes? And then just thoughts on on sort of like early May and into the summer? I mean, it does seem like there's, you know, some reason for optimism is things like, you know, travel pickup.

Yeah, I'll give you some high level, we don't, you know, we don't want to start giving Current numbers, it's probably not the right thing for us to do. We just saw sequentially things got better in the third quarter, particularly when you take into account just channel differences and just change and mix of business that each area of our business improved. And we've seen that continue into the month of April. Just ours had a couple record weeks food service. We've been having record sales weeks. So we're very encouraged.

Okay. And then a follow-up, I guess, probably for Jim. You know, Jim, you mentioned, you know, some of the temporary costs, you know, the over $100 million this year sort of, you know, rolling off. but you do have new hires coming in, you know, there's overtime should improve. I mean, the OpEx situation is kind of complicated, but as we look out into, you know, fiscal 23, is there a way that, you know, you can sort of, you know, help us all sort of frame that? I assume you don't want us just taking, you know, OpEx down by the temporary cost it sounds like, but like what happens from like an OpEx per case perspective? How do we think about that in 2023, given all the puts and takes?

Yeah, Ed, thanks for the question. Certainly not in a position to give OPEX guidance for 2023. We will give a lot more information about the business at our upcoming Investor Day in late June. But I think there are some things to think about. And if you remember, labor is by far the majority of our OPEX. Labor has been one of the largest pressure points, obviously, that we've felt across the last probably two years. And now we're starting to see trends improve both in temp labor, as we've reported on, as well as, I mentioned, overtime beginning to improve. And as those two things get better, just the natural progression of the supply chain starts to improve. It becomes more efficient, more accurate. We'll see less mistakes. We'll see less damage. And safety will improve. So it's a very good question. I think I'll leave my answer at that and really look forward to talking to everyone at Investor Day. Okay, great. Thanks, guys.

Thanks, Ben.

We'll take our next question from Mark Cardin with UBS. Your line is open.

Good morning. Thanks a lot for taking my questions. So to start, just in terms of the recovery, in some of the harder-hit COVID markets, are you still trending much below your historical volumes? And then how much of a leg to grip could this potentially be if so?

Well, I would say I look close every week at how many cases we're shipping out of each of the optos versus 2019. It's the best comparison that we can kind of grab. And, you know, many of our companies passed that last year. the ones that didn't tended to be a good bit behind those levels. That's where we're really improving as you would expect versus last year at the fastest rate of those markets that were really late to recover. And most of those markets have now surpassed 2019 for independent case growth. And when I say most, it's, you know, if there's two or three that didn't for the week, that's typically

uh a lot so uh we feel like we're there it's widespread uh and uh great to see great and then with the higher fuel prices how much protection do you guys have in place throughout the surcharges and through hedges and then how does this compare across your different business units is convenience treated differently thanks yeah i'll ask i'll answer on the convenience and i'm going to turn it over to jim um

You know, we're really looking at best practices very closely. Cormark versus EB and how they approach the marketplace. And the leaders of those two businesses have worked extremely well together, as we expected to see. And they have found kind of some common ground on what to put in place as a fuel surcharge. So we've made some great improvements in the convenience area as far as to you know, how much of the increase in fuel that we can capture. We've always done a good job in the other areas, and I'll let Jim comment on that. Yeah, you know, for any distributor, fuel is a meaningful piece of the operating expense. And we have two ways that we mitigate increases in fuel prices. The first is the fuel surcharge program. It's included in customer contracts, covers about two-thirds of our fuel consumption. and that allows us to pass along price increases to consumers relatively quickly and fairly. The other is our fuel collar program, and that covers about a third of our fuel consumption and provides protection from spikes in fuel prices. We will have some exposure up until the cap on the collar, but we're protected on the high end of the collar, and we're clearly starting to see the benefit from those fuel collars that we put into place. So we're really happy with how that's protected us somewhat. So with both of these programs in place, we can mitigate a good portion of the upward move in fuel prices, and there's a little bit of a lag. And we've mentioned that before, and all that's come in the past.

Makes sense. Thanks so much, and good luck, guys. Thanks.

We will take our next question from John Glass with Morgan Stanley. Your line is open.

Thanks very much. My question is on your food service supply chain. First, what do fill rates look like now? Are you still sort of down versus prior supply? Can you also talk a little bit about your inflation rate maybe versus your peers? Everyone's running hot. Yours seems to be higher than others in the food service business. Is there a specific reason for that? Maybe you saw inflation later. Maybe it's the mix of products. And what are you doing with your vendors to maybe help mitigate that inflation if anything can be done?

I'm sorry, could you ask that first question again? It broke up a little bit here.

I got the second one on inflation.

Yeah, the first one was simply on your fill rates to your customers. How has your supply from your vendors gone such that you are, you know, what is your fill rate to your existing customers in the food service business, please?

Yeah, we have seen constant improvement in our inbound fill rates from our suppliers. And I think that the supply chain is kind of getting back on its feet again. And we're typically in about that 95% range inbound. So we're real pleased there. I will add that in our Vistar world and our convenience world, that is not the case. It's still running in the 70s and much more difficult. As far as our inflation difference, maybe versus people that we compete in parts of our business, When it comes to food service, I think that part of it is we have a real outsized percentage of our business is in poultry. We supply a lot of the large chains in the country that are heavy or all chicken. We also do exceptionally well in our independent business in poultry, and that has had much higher rates of inflation. We also have a very large pizza business and anything wheat-related. is up significantly in price. We sell a lot of flour. We sell a lot of dough balls. We sell a lot of pizza crusts. So that's had an outsized effect on us. And I would say just center of the plate in general. We're growing faster in that area of our business than we are other areas of our business. And that's really having an impact on our inflation rates.

thank you your largest competitor is making a big push into independent restaurants particularly certain cuisines where you've historically had strong market share are they're starting to show up more often as a competitor are you seeing that impact or is this market so large that that is not an influencer impact on your business today well i think it's a really large market we'll start with that it's a huge market actually and uh

Our competitive set is really pretty much the same as it has always been, and they are big, and they're strong, and they're tough, and they always have been, and I would imagine they always will be. Thank you.

We'll take our next question from Kelly Daniel with PMO Capital Markets. Your line is open.

Hi, good morning. Thanks for taking our questions. We just wanted to ask about just synergies here. We had mapped out your kind of pro forma earnings power with Core and Reinhart with your synergies that you expected at about $1 billion. And you're basically saying you're going to be there this year. So I guess just the question is, can you update us on where you are with those synergies that you outlined originally, how much you think will be kind of in the run right by the end of this year and how much is left for future years?

Well, I'm going to comment on what we're doing there, and then I'll turn it over to Jim to give maybe some high-level numbers. We've progressed from the synergy standpoint much faster with Cormark and EV than we have with Reinhart. And the biggest reason for that is the businesses are very similar. The SKU base is very similar. The structure... But as I mentioned earlier, the two leaders of those two businesses have just done a great job of lining things up such that, you know, in some areas, you know, we've kind of approached the business the way EB did. In some areas, we've approached the business the way that Cormac did. But they're very similar businesses, and we've been able to make some quick progress there. On the Reinhardt front, the scheme base is very different. We have synergies that we're probably at least a year, maybe two years away from even making the moves to get those synergies. Reason being our SKU base is very different, number one. Number two, we overlap a great deal. And, you know, getting ground broke and getting permitting and getting a new warehouse is built is a very long process. So we don't want to give up any capacity at all physical capacity. So we've continued to overlap. There's obviously additional expense from from a distribution costs, you know, when you do that. But the Reinhardt business has improved so much so quick. Their growth is running at such a great rate right now, there just isn't any reason to go in and really disrupt the business. And I think when you get good growth and earnings because of the performance of the business, I think that is more important than trying to grab synergies at any quicker rate than the business itself can handle it. And I think right now there's just no reason to disrupt We've done a great job of getting the synergies that we feel were appropriate to get. But I think, you know, the synergies in the Reinhart Performance Food Service combination will continue to benefit this company for two, three years in the future. Jim? Yeah, I think George's answer was actually right on. And I'll only add a little bit of color because I thought that answer was a exactly the way the thing needs to be described. And I'll speak to both Reinhart and Cormark at the same time. I would say this, that because the Reinhart organization that we acquired and brought over and the Cormark organization leadership team, et cetera, that we brought over, because both of those groups are working so well with our existing organization, that the integration work is right on track to probably a little ahead of schedule in both and gone really well. Very pleased to see integration, especially back office integration, do so well. And from a synergy perspective, from a financial synergy perspective, we are right on track with our expectations and what we had talked about for both of those.

Okay, that's very, very helpful. And just maybe to follow up, I think maybe, Jim, it was you that made the comment, understand where your head is at in terms of additional strategic opportunities. You have enough on your plate with CORE and Reinhardt. I mean, it sounds like they're going well, but what are you seeing out there? Are you actively?

Yes. So first, regarding to what's on our plate, I want to be really clear with this.

We have a very strong and robust balance sheet. Our liquidity is exceptionally strong, and we're really pleased with the financial ability that we have from that perspective. So we're in very good shape from a balance sheet perspective. From a bandwidth perspective, The Cormark and Performance Food Group team, which is now one team, have, as I mentioned, done a very good job with integration. That's on its path. And I think from a bandwidth perspective on the convenience side of the business, we're starting to develop additional bandwidth. And so things are freeing up there. On the broad line or food service side of the business, the Reinhardt organization is fairly well integrated in the food

So we have liquidity, financial capacity, and the strength to integrate another acquisition.

That leaves us with acquisition opportunities or strategic opportunities. We will be very selective and strategic in what we would target. And at this point, at this moment in time, I don't see that opportunity presenting itself, but I think I'll ask George to comment on further in the future. Yeah, we are always going to be opportunistic, and if something came along that really fit, you know, another Reinhart-type company would be fantastic. We would jump through hoops, you know, to get it done and get it done at the right valuation. Now, with some of the things we've done, Pat Haggard used to day-to-day run our Vistar businesses, very experienced in the M&A area, and he's got a heavy concentration on that. So I think you'll see us do some things, but they're not going to be real large. They're not going to be far from what we're going to be in our future. But there's some things that we need to get done to give ourselves some better capabilities, particularly in the convenience. In the Vistar business, you know, we mentioned the three retail automated facilities that we have, and we would like to have more of those and we'd like to have more capability there. And at this point, you know, we've done all that we would like to get better.

And I think we'll be – you'll get a better feel by coming to our investor day as to where we're headed with our different businesses. Thanks.

Please, your line is open. Thank you for the question. So it seems like you guys are having a lot of success pushing through inflation.

is cognizant, really cognizant of what this inflation is doing on our customer. And a big deal of our ability to keep our margins comparable to where they were before this just crazy inflation is a change in our mix of business.

I mean, we're just really focused on the parts of our business where we have more to bring the customer and we tend to be able to get a higher mark trying to make sure that we in levels in a food service business where you're running close to 20% inflation.

You know, we still have product areas that we price on a cents per pound. Obviously, you need to get a little bit more when you've got a lot of inflation.

But we've done a great job in our gross profit per case. I think the industry probably as a whole has done a great job there. But we're their customer. sees too much inflation and we don't want to see any destruction to demand. I talked about earlier, we just don't see it. I mean, it's remarkable that we just really haven't vacationed. We have less inflation in our convenience and our Vistar business. We have a sizable business with value stores where they tend to

do well. So far, it's going to slow down demand. Thank you, Jim. I want to add to that. I agree, and we are managing inflation effectively now. We have been for a while. and I would expect us to manage it appropriately going forward.

At the same time, we're intentionally focusing on growing cases in our most profitable lines of business, including independent restaurants, food and food service in the convenience, as George mentioned earlier, and high-margin Vistar channels. That Vistar business is very new to result in top-line and EBITDA growth, improving our margins and drive surely.

We understand it. We believe we know how to manage it, and we'll continue.

Great. Thank you for that. On the independent case growth, can you just talk about the composition of growth in terms of the magnitude coming from new customer acquisition versus wallet share, whether that's more balanced this quarter?

Sure.

Yeah, our penetration in existing accounts, they've been accounts that we sold this year and we sold last year, continues to run at the highest levels it's ever run at.

And I think that part of that is there are your staff properly, you're going to be doing, you know, significantly more business than the previous year.

That has waned some, and particularly in our pizza channel, because They were less options a year ago, and they were doing it exceptionally well. That's why I'm so pleased that we were still high single-digit case growth there. It was very, very pleasing. Based on our level of service that we've had in the markets, as I mentioned earlier, I'm very encouraged that where we are staffed properly and we're servicing our customers well, we are growing rapidly.

well into double-digit our number of new accounts over the previous year.

And I do believe that in the future quarters, it's the new business that's going to drive our growth much more so than further penetration within existing accounts.

We will take our next question from Andrew Wolf with CL King. Your line is open.

Hi, can you hear me on this phone? Oh, yeah.

That last question, the 4,500 new independent customers, is that, you know, I haven't heard that metric before.

Could you kind of compare that to a pre-COVID period or any kind of, I mean, is that kind of a breakthrough number for you? I know you said it's a little lumpy based on your service levels.

Yeah, it is a breakthrough number for us right now. You know, $4,000 was always a big hurdle. We're doing it really without it being very widespread. So that's an encouraging one. I think accounts are starting to open back up with new ownership. I think that probably is helping us as well. But I think the bulk of that is by going out and selling an existing restaurant that we hadn't sold before.

And is there anything in the market that's changed? I mean, are there less, you know, smaller competitors, or is it just more what PFG is doing in terms of your own sales process?

I guess the only thing I would say is it seems like distributors have cut back on their geographic area.

So, you know, they may have gone 150 miles to another metro market before and they aren't now. But even that's not real widespread. I think the marketplace just kind of, you know, is what it is.

And just a quick housekeeping probably, I think, for Jim. I think there was other income of a little over $11 million in the quarter. Was that related to holding gains at Cormark or is there something else in there?

No, that's a benefit from fuel hedges and derivative accounting. That's where that gain goes. When I talked about the fuel collars, we are very pleased and encouraged by the effectiveness of that program, and it's been very helpful. And so the benefit is recorded in that line.

Got it. All right, thank you.

We will take a follow-up question from Edward Kelly with Wells Fargo. Your line is open.

Hey, guys. Thanks for taking the follow-up. Just a couple, you know, quick things for you.

One on fuel, you know, Jim, you just mentioned that, you know, the hedges are sort of in other, but then the cost of the rising fuel cost is actually kind of sitting in OPX. So the EBITDA, I guess, is kind of understated because you're not including, you know, the offset there. And then just over time, you know, how do we think about the impact of higher fuel costs as, you know, kind of hedges roll off?

Well, so the first one, first comment, I'm going to leave alone because that was a comment that was correct, and we're following GAAP accounting under derivative accounting. On the second part,

go up, we will continue to be very strategic in how we place hedges and acquire collars and invest in those.

There could, of course, potentially be some erosion in the benefit, but I'm not projecting that right now. We'll just have to manage that over time.

And then, George, just one quick follow-up for you. You had mentioned on the C-store business and how sales are being allocated either between the convenience segment or the food service segment. Does this potentially kind of hurt the optics around how we look at food service sales, meaning like there could be food service sales that are now included in I'm just kind of wondering, because I think people do look at those segments, and I'm just kind of curious as to if there's sort of like numbers shifting around there.

Well, the reason that we want to get the numbers out that way is just, number one, we want to show the strength of our food business and convenience. And number two, we do expect the nicotine category to be one that erodes over time. And we've always been a company that pride ourselves in our sales growth. And that portion of our business, you know, we're not going to have that sales growth. What we're doing, when we have an independent convenience store and that's shipped from a performance food service, that goes into independent sales for food service. But when we report the food part of our business for convenience, it'll also be in there so that we can show what the growth is in that food category within convenience. If it's a national account and we bring in, um, the food program and it's done out of performance food service it will show up in our national business and performance food service but it'll also show up in our food business with inconvenience so do you get that okay yep yep that makes sense all right thanks guys thanks and we'll take our next question from william bruder with bank of america your line is now open

Hi, this is Marianne for Bill. Thanks for taking our question. So first, are you still targeting leverage in that 2.5 to 3.5 times range? And if so, do you have any sense of when you may get to that range?

So first, yes. Our sweet spot from a leverage perspective and where we like to operate absent a large acquisition is 2.5 to 3.5 times. We have not provided guidance on when we would achieve that. However, we did clearly say it, and we continue to believe it's very important for us to pay down debt. We are very focused on that, and we will continue to make sure that's an important investment for us with our free cash flows to pay down debt.

Got it. That's helpful. And I know you mentioned that fill rate. for convenience in Vistar remain challenged, but has there been any sequential improvement or are you expecting any improvement there?

We have seen sequential improvement. It's slow. And I will, I don't want to get too complicated here, but it's kind of a hard number to figure because there are items that the suppliers have elected not to produce during this period of time. and the customer is ordering them with every order that they put through. So our fill rates versus, say, the expectation of the customer, that expectation of what they're getting may be better than what our fill rates show, but the improvement that we're seeing is very slow improvement. And if you think about it, it's pretty logical. I mean, our food service business, a lot of what we sell is center of the plate cheese. I mean, they're basically one or two ingredient items. So as long as that one or two items are available, then they have the product. When you get into our Cormark and Vistar business, most of what we sell there has multiple ingredients, so there's multiple chances of that ingredient not being available. So the fill rates are, you know, the availability is less. And the other thing I would add to that is particularly, you know, going through the tougher COVID periods when they couldn't fill demand from a retail, say, a CPG-type supplier, And they had 15 flavors of an item. They would take it down to five or six. So they didn't have to change out the lines as often. They could produce more product because they were selling everything they could produce. And many of them today still selling everything they can produce. So they're just not going to offer the type of variety. And our customer will continue to order those items that are not being produced today. Long answer, but I think that would give you a better understanding.

That's helpful. Thanks very much.

We'll take our next question from Joshua Long with Piper Sandler. Your line is open.

Great. Thank you for taking the question. I wanted to circle back to the inflation piece and maybe see if you guys can talk about a couple of the tool sets or platforms or maybe some of the value-creating investments that you alluded to in terms of being able to manage inflation but also pass along value to your to your end customers and maybe within the context of the private label opportunity well our our performance brands we continue in legacy performance companies to run

in that little bit over 50% range and continues to grow of our business. And I tell you, Reinhardt's improving like they are in everything. They're improving at a fast rate, and I think that they will probably make it there as well. And we do feel like that gives a better value to our customer. You know, we focus heavily on our brand, but we're also – but real conscious that if something else is a better price value for our customer, we certainly don't mind selling that. It fits in with us real well. We're not spending a lot of time trying to change what the customer does use. Certainly if they come to us and they want something that's more competitive and We will show them every offering that we have, but for the most part, we're just trying to be real consistent and encouraging the customer to get a higher menu price as opposed to affecting their cost of goods. Thank you.

Okay, we'll take our last question from Jeffrey Bernstein with Barclays. Your line is open.

Great. Thank you very much. I want to follow up on the market share opportunity. I feel like if we look back in three years, it would seem like the period post-COVID would be such a huge opportunity.

I'm just wondering if you could prioritize where you think that would come from, whether it's picking up new accounts or further penetrating existing accounts or M&A of smaller competitors or perhaps just closures of those competitors. Just kind of get a sense of whether you believe this would be

a outsized period of market share gains and where you prioritize that coming from? Our best market share gains, at least from the information that we get, were the several months after the first shelter-in-place came. And we're probably right now still a little bit better than we've done in the past. We haven't been able to get these numbers for a long time. I think that new accounts is going to be the biggest way in which we can gain share. It's just such a big market. There's so many accounts, and there's so many accounts that we don't sell. I think it's just an inevitability that we're going to grow, and that's how we're going to grow.

Just on the inflation front, like you mentioned, commodity is approaching 20%. I'm just wondering,

I mean, how long is that sustainable?

You would think as you lap the difficult compares during the summer that naturally, even without spot prices easing, you could see a significant pullback on that inflation level. Is that fair to assume that we see a significant pullback in coming quarters? Or are there reasons to believe that spot prices are accelerating and therefore we could be talking about 15, 20 percent inflation even in the back half of calendar 22 and into 23?

I feel like there's going to be less sequential inflation than there has been, but I will tell you I've been feeling that for a while. It has happened. It's been incredibly stubborn, the inflation that we have. But what I see is I see the supply chain starting to come together, and it's really finely tuned, particularly when it comes to perishable product. And it's labor-based. It's ingredient-based. And that's what we're seeing. We're seeing definite improvement in the supply chain. And some of those efficiencies I think led to a good bit of the inflation. You know, we do hear, you know, of late a lot of problems that, you know, have to do with the Ukraine, you know, Russia area when products were, you know, their significant part of what the world consumes. But that's, you know, that's not a huge assortment of products. But I think that could continue to go up, but I just have the feeling that sequentially we're going to see less.

Understood. And just lastly, is it safe to say that labor, you would say, would follow the same trajectory as Staffing's getting better, maybe overtime's easing, turnover's easing. Should we assume in coming quarters that, again, maybe it's taking longer than you would have expected, but that we're now looking at a rate of easing?

Yeah, we're hopeful, and we are, you know, we're seeing improvement in most of the markets. Not all, but most of the markets with labor. And I do think that's a big part of the inflation. Understood. Thank you. Thanks.

We have no further questions on the line at this time. I will turn the program back over to Bill Marshall.

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

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.