Performance Food Group Company

fiscal year Q1 2023 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 PFG. Please go ahead, sir.

Thank you, Shelby, and good morning. We're here with George Holm, PFG's CEO, Jim Hope, PFG's CFO, and Patrick Hatcher, Vistar president and COO. As previously announced, Patrick will be assuming the CFO role for PFG at the start of the calendar year. We issued a press release regarding our 2023 fiscal first 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 first quarter. As a reminder, in the second quarter of fiscal 2022, we changed our operating segments to reflect how we manage the business. The 2022 fiscal first quarter results have been restated to reflect the segment change. The results discussed on this call will include gap and non-gap results adjusted for certain items. The reconciliation of these non-gap measures to the corresponding gap measures can be found at the back of the earnings release. With this fiscal quarter, we have updated our segment reporting metrics to adjusted EBITDA from the prior EBITDA metric. Segment results for the fiscal first quarter of 2023 and the fiscal first quarter of 2022 now 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 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. We're off to a fast start in fiscal 2023 with top and bottom line results exceeding our guidance and a strong backdrop for continued success. Contribution from all three operating segments shows our company's broad-based strength across channels. In food service, we continue to pick up market share in independent restaurants, while showing operational improvement, two factors in our strong profit performance. NISTAR's underlying momentum was further boosted by the recovery in many of their channels, providing profit growth that exceeded our prior announced expectations. Finally, our convenience business remains robust, with additional business wins in the food, food service, and related products area. We have now owned Coremark for a little over a year and the results are better than we had expected when we announced the transaction. Our consolidated results put us on track to exceed our original outlook for fiscal 2023 and to hit the three-year outlook we provided at our investor day in June. As a reminder, our three-year targets are for 62 to 64 billion of revenue, and 1.5 to 1.7 billion of adjusted EBITDA in fiscal 2025. Today, I will share details on our food service and convenience business units before turning it over to Patrick Hatcher, who will give color on our VISTA operations. Finally, Jim will provide an update on our financial position and outlook for the remainder of the full fiscal year. As you saw in our press release this morning, Our first quarter results have allowed us to confidently raise our sales and adjusted EBITDA guidance. This confidence is supported by the momentum our business has achieved, our broad channel and product portfolio, and the resilience of our customers and the consumers they serve. The backdrop for our business remains positive, with a resumption of more normal consumer activity through the summer and into the early fall. The slight moderation in restaurant traffic was more than offset by our market share gains, a continued recovery across Vistar channels, and steady growth in our convenience segment. We closely followed the macroeconomic conditions and various outlooks for calendar 2023. As we have highlighted, we feel very good about our positioning in the market, which is reflected in our overall top and bottom line performance. We see our broad portfolio of away-from-home channels as a steady growth engine, even in a more challenging economic climate. A few specific proof points for the quarter. PFT's food service segment continues to outpace the overall market, particularly in the important independent restaurant space. In the quarter, total independent restaurant cases grew 6.9%, while organic independent cases were up 4.6% year over year. We continue to see market share gains across key independent categories. Growth in independent restaurants has been driven by our strong performance in center of the plate proteins, as well as our performance brands, which have remained at record levels. Strength in these areas are significant contributors to our margin and profit performance. In the fiscal first quarter, performance brands penetration achieved an all-time high and represented over 50% of our independent sales dollars. For independent restaurants, we have focused on adding new accounts. As we discussed last quarter, penetration within accounts has slowed as higher inflation has impacted foot traffic. However, our ability to grow new accounts was a key factor in our organic case increase and bodes well for the future when foot traffic begins to reaccelerate. As we noted in this morning's press release, our growth in independent restaurants was offset by a decline in our chain restaurant business. We have shown caution concerning the chain business we take on, and we have focused our efforts on accounts that fit well within our distribution network. Even with the case declines in our restaurant chain business, we continue to see improving profit contribution from this area of our business. Part of the outperformance is the result of a slow improvement in our food service supply chain. Recently, overall food service inbound fill rate hit close to 97%. Our supply chain still has room to improve. However, we remain optimistic that it continues to trend in the right direction. We also benefited from improvement in our operational trends driven by staffing improvements and reductions in temporary labor. As we have discussed over the past several quarters, efforts to reduce temporary labor are expected to drive better productivity and lower expense ratios. We are seeing this materialize with consistent week-by-week improvement in service excellence, lower levels of shrink, and a decrease in warehouse overtime. We believe there is still more improvement to come over the next several quarters, but it is rewarding to see the hard work of our food service associates translate into productivity gains. Our food service segment is performing at a high level with solid growth in independent restaurants. Coupled with increased efficiency in our operations, the segment is producing higher margins and profit growth. Food service segment adjusted EBITDA margins improved 55 basis points over the prior year period. Turning to our convenience business, we remain extremely pleased with the progress Cormark has made as part of the PFG organization. In September, we passed the one-year anniversary of the closing of the acquisition. Within that year, the team has made significant strides as we integrate the organization while continuing the consistent business momentum. During the quarter, we announced our convenience business would operate under the Coremark brand, demonstrating the collaborative effort of our entire C-Source team. The combination of the two management teams has been a seamless transition, a tribute to the management of both companies. Hence, the results have remained impressive. Our non-nicotine portfolio grew sales at a high teens rate in the quarter, offsetting the low single digit decline in nicotine product sales. The mixed shift to higher margin food and food service related product categories continues to drive both growth and adjusted EBITDA margin improvement in the segment. In addition, our cost synergy capture remains on schedule. We are excited about the prospects at Coremark and expect continued business wins to drive value from this transaction. I'd like to spend a moment discussing the inflation environment and how it has impacted our business. Overall product inflation in the physical first quarter was up 12.3% year over year, a sequential deceleration compared to the 13.6% increase in each of the prior two quarters. The deceleration in total cost inflation was driven by a sequential decline in the rate of growth in our food service segment, which saw inflation grow in the low teens compared to a high teen increase in the prior two quarters. This is still well above historical levels, but a fairly sizable drop since the spring and early summer. The decline was driven by center-of-the-plate proteins, such as meat, poultry, and seafood, which were close to flat on a year-over-year basis. Outside of these categories, inflation continues to run well into the double digits, with notable increases in dairy, eggs, produce, and disposable items. We believe inflation will continue to moderate in food service through the balance of the year. Inflation at Distar in the convenience segment remains high and actually accelerated in the fiscal first quarter. We continue to see significant pricing actions across a range of categories, particularly candy and tobacco. At Vistar, inflation was in the mid-teen level in the quarter and increased sequentially in each month of the quarter, up from a high single-digit increase in the prior two quarters. In the convenience segment, inflation was also higher sequentially, though not as dramatic an increase as at Vistar, with convenience inflation ticking up just into the double-digit range in the quarter and fairly steady across the three months of the quarter. Inflation in these two segments has produced larger than typical inventory gains in the quarter. As we noted last quarter, these type of gains are not atypical, particularly for CPG categories like candy and cigarettes. We continue to expect these gains to moderate through the balance of fiscal 2023. This is all factored into the updated guidance we provided this morning. To summarize, we are very pleased with our first quarter results, which put us on the right track to have another successful full fiscal year. We are getting top and bottom line contribution from all three operating segments, and the backdrop should provide continued growth in the quarters ahead. Our team has done an excellent job keeping operating expenses in check with improvement in labor due to lower levels of overtime and temporary labor costs, which is helping offset higher wages. Product inflation is certainly helping our profit results, but our underlying business and market share gains are supporting long-term profit, and we are very much on track to achieve our 2025 vision. With that, I'll turn it over to Patrick, who will provide some highlights from Vistar.