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spk01: Thank you and good morning. We're here with George Holm, PFG's CEO, and Patrick Hatcher, PFG's CFO. We issued a press release regarding our 2023 fiscal second quarter results this morning, which can be found in the investor relations section of our website at pfgc.com. During our call today, unless otherwise stated, we are comparing results to the same period in our 2022 fiscal second quarter. As a reminder, in the second quarter of fiscal 2022, we changed our operating segments to reflect how we manage the business. The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found at the back of the earnings release. As a reminder, in the fiscal first quarter of 2023, we updated our segment reporting metrics to adjusted EBITDA from the prior EBITDA metric. Accordingly, the segment results for the second fiscal quarter of 2022 have been restated to reflect this change. Our remarks on this call and in the earnings release contain forward-looking statements and projections of future results. Please review the cautionary forward-looking 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.
spk08: Good morning, everyone, and thank you for joining our call today. The momentum we saw in the fiscal first quarter carried through in the second quarter with solid top-line results and larger-than-anticipated margin gains, which drove a nice profit beat compared to our published expectations. We are also experiencing very encouraging signs in the more recent weeks with an acceleration in our case growth, particularly in the independent restaurant channel, Some of this improvement may be related to the impact from Omicron in the prior year period. However, we believe there are signs of a more stable landscape to begin calendar 2023. Our business units are also operating at a very high level, producing outstanding top line results while driving efficiencies to fuel our profit growth and margin expansion. This aligns with our three main objectives, which include consistent profitable top line growth, adjusted EBITDA margin expansion, and leverage reduction. As you can see from our fiscal second quarter results, we're making progress on all three of these fronts, which we believe will drive long-term shareholder value. This morning, I will provide a few thoughts on our business results, economic factors, and our vision for the future. Patrick will then review our financials and guidance assumptions. As you will hear from Patrick, we are pleased to be raising the bottom end of our fiscal 2023 adjusted EBITDA guidance range, just a month removed from the increase we announced at the ICR conference. We also reiterated our three-year outlook and believe we are very much on track to achieve these targets in fiscal 2025. In a moment, I will talk through the reasons that we feel confident in our outlook for this year and beyond. We have designed our business to be successful in a range of operating environments with three distinct operating segments. each with its own model characteristics and growth opportunities. We are already seeing the benefits from this structure and believe it makes us unique in the marketplace. A few thoughts on how each of these business units are achieving success. I will begin with our food service segment. Strong operating results in food service in the fiscal second quarter were similar to trends from the fiscal first quarter. Our independent restaurant case growth outpaced independent industry growth yet again, offset by softer chain restaurant business. As we have described, some of the softness and changes related to business we have exited. In addition, there is softness in foot traffic that is producing lower same-store sales for our customer base. We believe we have struck a good balance within the national chain account business with a focus on profit contribution and return on capital. In the independent restaurant area, our results continue to impress. Our organic independent restaurant cases grew 4.3% in the fiscal second quarter, just below the 4.6% growth we experienced last quarter. We have high expectations for our independent case growth and are working hard to improve upon these numbers. However, in the context of the operating landscape and the market share data we receive, we are very pleased with our performance compared to the industry trends. Once again, our growth in independent restaurant cases came from the addition of new accounts. In fact, new account growth exceeded case growth, which is rare for our company. We are pleased with the pace of new account additions and believe that these customers will provide a long runway for volume sales and profit growth in the future. Furthermore, in the month of January, independent case volume was quite strong, which was certainly encouraging. However, we do feel our comparisons were impacted by Omicron last year. We're also seeing success in our performance brands, which continue to do exceptionally well and, once again, achieved record levels of independent restaurant penetration. Company-owned brands have filled an important need for our customers, providing high-quality products at a good value and help with customer retention. This helps offset persistently high year-over-year inflation without sacrificing quality. We continue to expand our company-owned brands with new product offerings and new categories. Inbound and outbound fill rates for food service have continued their steady march forward. By the end of fiscal second quarter, inbound fill rates were approximately 97% for food service, with outbound fill rates approaching 99%. We believe there is still room for improvement on the inbound side. However, we are getting increasingly close to historic levels from our supplier community. Before moving on, I wanted to speak to the inflationary environment of food service. Once again, during the second fiscal quarter, inflation decelerated month by month and ended the quarter at 9.6% for our food service products. We continue to believe that inflation normalization is healthy for the market, our customers, and their consumers, and we are pleased to see the year-over-year inflation declining. Still, we must manage the dynamics closely to remain competitive in the marketplace while not sacrificing profitability. We have systems in place to accomplish this goal and feel comfortable that we can remain successful in a decelerating inflationary environment. In fact, during the second fiscal quarter, our inventory holding gains were down year over year due to the decelerating rate of inflation. This was true in both food service, convenience, and as a total company. This is to be expected and how we have modeled our full year guidance. Our ability to grow profit and margins without the same level of holding gains demonstrates our company's ability to manage through this environment and should provide confidence in our profit path in the quarters ahead. Turning to Vistar, the recovery continues in many of Vistar's channels, which is reflected in another strong quarter for the segment. Total Vistar case volume was up in mid-single digits compared to the prior year period, driven by growth in multiple channels, including office coffee and vending. At the same time, the theater channel did not quite live up to the high expectations for December, with several blockbuster releases not generating as much office revenue as was originally expected. Again, the high-quality sales and profit results, despite a slower recovery in the theater channel, speaks volume about the execution at that organization. Another encouraging sign for VISTAR is the improving inbound fill rates. While still tracking well below historic levels, fill rates have moved steadily higher throughout the first two quarters of the fiscal year, with inbound rates now in the mid-80s, with outbound rates in the high 80s. Suppliers have indicated that better access to raw materials and stability in the workforce are producing improvement in fill rate levels. There is still room to go, but there is another tailwind working in Vistar's favor that we believe will help support top-line momentum. Finally, a few comments on our convenience business. We are pleased with the direction of this segment and see significant profit growth opportunities in the years ahead. In the fiscal second quarter, convenience did see a moderate decline in profit due to the lower inventory holding gains that I just discussed. Excluding the inventory gains in both years Q2, convenience segments adjusted EBITDA would have grown nicely compared to the second quarter of 2022. I will also note that convenience results in the month of January were excellent versus January of 2022. Margin expense in the convenience segment is being driven by several factors, including better top line mix and operating efficiencies. We are particularly pleased with the growth of our non-nicotine portfolio, which experienced another quarter of mid-teens sales growth year over year. We believe that a significant amount of shareholder value derived from the Coremark transaction will come from PFG's ability to grow food and food service related products into the convenience channel faster than Cormark could have as a standalone company. We are seeing this play out in the market, but believe it is still early days. We have a steady pipeline of potential new business in the convenience space, which we expect to produce consistent top line growth for the segment. We were also right on track to achieve our three year synergy target of $40 million. We remain very pleased with how the integration of Cormark has proceeded and are excited for what's to come within the convenience segment of our business. In summary, we closed calendar 2022 with good company results, beating our previously announced profit expectations through a combination of high quality top line growth, positive product and channel mix shift, and consistent productivity improvements. The operating environment has provided some challenges, though, It was steady through the quarter, and we are seeing some hopeful signs early in calendar 2023. Our organization has done an excellent job driving efficiencies, which has produced consistent top and bottom line results for the company. While there is still some uncertainty in the broader macroeconomic environment, we believe our outlook for the future is bright, and there remains significant opportunity to keep our growth momentum going. With that, I will turn the call over to Patrick to review our financial results and outlook in more detail. The CFO transition from Jim to Patrick has been excellent. It is typically a challenge to enter a new role and often even more challenging to exit. Jim and Patrick accomplished a smooth transition which has been seamless for our organization.
spk03: Patrick? Thank you, George, and good morning, everyone. Our business results in the fiscal second quarter of 2023 exceeded our announced expectations, with sales in the quarter at the top end of the outlook we discussed on our first quarter earnings call and adjusted EBITDA at nearly $30 million above the outlook we provided at that time. Our operating performance has allowed us to build upon an already strong financial position. As George mentioned, this is my first earnings call in the CFO role for PFG. I'm excited to continue to help lead the organization to new heights and have entered my new role with a strong business position. Our main strategic priorities are unchanged. We will focus on three areas to drive value, sustained profitable sales growth, adjusted EBITDA margin expansion, and lower leverage. I'm pleased to report that we once again made progress in all three areas during the second quarter. and we are optimistic that this will continue. Before reviewing some of the financial highlights from our fiscal second quarter, I'd like to review two important areas, cash flow and leverage. Our organization has been diligently focused on driving strong cash flow, which is an important objective in our growth strategy. Over the first six months of fiscal 2023, PFG generated approximately $425 million of operating cash flow through a combination of our solid business results and improvements in working capital. This was significantly higher than our cash flow in the prior year period. Despite tobacco purchases that occurred towards the end of calendar 2022, we expect these tobacco purchases to be cash generative in the fiscal third quarter of 2023. With this operating cash flow, we invested about $98 million in CapEx during the first six months of fiscal 2023. These capital projects are vital to our long-term growth and are primarily focused on increasing our warehouse capacity, improving supply chain technology, and streamlining our operations. Investment back into the business will remain one of our top uses of cash and sustains our long-term sales growth and margin improvement objectives. After taking capital spending into account, PFG generated about $326 million of free cash flow in the first six months of fiscal 2023. The vast majority of this cash flow went to reducing the outstanding balance on our ABL facility. This gets to another key priority. reducing leverage. Last quarter, we shared that we had reduced leverage to just below the top end of our 2.5 to 3.5 times target range. We were pleased with this achievement as we moved into our target range faster than we anticipated. This focus has continued to pay off, and at the end of our fiscal second quarter, we achieved a 3.3 times leverage ratio on a trailing 12-month basis. We believe that lower leverage, particularly in the current interest rate environment, is a good value creating use of cash flow for our investors and other stakeholders. Our balance sheet and debt position is strong. At the end of the fiscal second quarter, about 76% of our outstanding debt was at a fixed rate, including swaps we have in place against a portion of our floating rate ABL facility. While our average interest rate on the ABL facility did move higher, along with the broader market, we have mitigated a significant portion of our floating rate exposure. We are well equipped to manage the interest rate moves, but keep in mind that we would expect our average interest rate to move along with the market on the portion of our ABL facility that is not hedged. With that, let's review some highlights from our fiscal second quarter. As disclosed at the ICR conference a month ago, PFG total net sales increased 8% in the second quarter to $13.9 billion, which was at the very top end of the outlook we discussed during the first quarter earnings. Total case volume increased 3% in the second quarter, driven by growth of independent restaurants as well as gains in Bistar and a small contribution from an acquisition. Total independent cases were up 6.6% in the second fiscal quarter, while organic independent cases increased 4.3%. Outperformance in the independent case volume continues to reflect market share gains and new business wins in that important high margin business. Total PFG gross profit increased 17% compared to the prior quarter. Gross profit per case was up about $0.81 in the second quarter compared to the prior year period. In the second quarter, PFG reported net income of $71.1 million and adjusted EBITDA increased 28% to about $309 million. Inflation continues to impact our business, and as George discussed earlier on the call, inflation continued to moderate to lower year-over-year inflation in the food service segment. Total company cost inflation was 10.3% in the quarter. This included a 9.6% increase in food service. Fistar inflation remained at the mid-teen level in the quarter, while convenience experienced inflation just above 10%. Inflation for both Fistar and convenience were very similar to what they experienced in the fiscal first quarter. We continue to expect lower levels of inflation through the remainder of fiscal 2023, which is the assumption embedded in our outlook. Our early read on January supports this view, with inflation, particularly in the food service segment, continuing to slow. On a consolidated basis, inventory gains were lower in the second quarter of fiscal 2023, with a notable decline in convenience and a smaller decrease in food service, partly offset by a slight increase at Vistar. We are pleased with our total company profit result, which more than absorbed the lower inventory gains compared to the prior year. We expect a similar dynamic through the rest of fiscal 2023 and into the first quarter of fiscal 2024. However, beginning in the second quarter of fiscal 2024, the comparisons ease considerably based on our most recent results and expectations for decelerating inflation over the next two quarters. The company's second quarter adjusted EBITDA margins increased 33 basis points compared to the prior year period, a solid result in any operating environment. However, this margin performance was even more impressive considering the headwind from lower inventory gains. Excluding inventory gains in both periods, total company adjusted EBITDA margins would have increased even more year over year for the quarter. We expect net gains from worker productivity, including lower overtime and temp costs, to help offset the inventory gain headwind over the next three quarters. Diluted earnings per share was 46 cents in the second quarter, and adjusted diluted earnings per share was 83 cents. As you saw in our earnings release, we have reiterated our full year 2023 revenue outlook and raise the bottom end of our full year adjusted EBITDA range. This comes just a month after increasing the adjusted EBITDA range at the ICR conference and reflects our confidence in the underlying business momentum and consistent execution from all three of our businesses. In the fiscal third quarter of 2023, we anticipate $13.7 to $14 billion in net sales. We also expect adjusted EBITDA in the range of 270 to 290 million in the fiscal third quarter remember that the seasonality of our fiscal third quarter typically reflects lower sales and profit in the months of january and february with an acceleration in march for the full year we still anticipate net sales in a range of 57 to 59 billion dollars Adjusted EBITDA is now anticipated to be in a range of $1.27 billion to $1.35 billion, up from our prior $1.25 billion to $1.35 billion expectation. As George mentioned in his remarks, this keeps us on track to achieve the three-year fiscal 2025 targets we set at our June investor day. To wrap up, our company is in a great financial position, which is reflected in our earnings results, and financial outlook for the remainder of the fiscal year. We are making great progress on our three focus areas, sustained profitable sales growth, adjusted EBITDA margin expansion, and lower leverage, while generating significant operating and free cash flow. Our organization is executing our strategy, and we are well positioned to continue to create value for our shareholders over the long term. Thank you for your time today. We appreciate your interest in Performance Food Group. And with that, we'd be happy to take your questions.
spk11: At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 to ask a question. We will pause for a moment to allow questions to queue. We'll take our first question from Edward Kelly with Wells Fargo.
spk05: Hi. Morning, guys. Nice quarter. I wanted to first just touch on the procurement inventory gains. George, can you talk about how these gains in Q2, I know they're down year over year, but how do they compare to what you would consider normal? And then as you progress through the back half, What's the I don't know, is there a possible sort of quantify what that, you know, headwind would look like and then, you know, the timing of when the productivity gains, you know, would offset that?
spk08: Yeah, first of all, I would say that last quarter was fairly normal for inventory gains below normal for core mark. You know, we think it makes sense for us to call these out. We have always had them. We've been very aggressive because of the inflation that's been out there. We've done a pretty good job of anticipating where these increases would come and carrying additional inventory. So I think we're in an unusual period for last year and for this year. And that's the only reason we call those out. But they're part of, I guess I would call it our quarterly life around here. As far as the back half of the year, the quarter that we're in now was very good last year, higher than normal for inventory gains. Q4, a little more so. And then Q1 of next year was when we peaked. And as I've mentioned before, those come from sequential inflation, not really from inflation from the previous year. And the sequential inflation deflation that we've had the last couple quarters is what's kind of tempered that. But we still made some very good buys. And then in the convenience area, you know, we have one that we did last year that we recognized the profit in Q2 that we'll be recognizing the profit in Q3 this year. As far as how those are going to affect our results, they're certainly built into the guidance that we give And we're in a little bit of a race here that during the period of time where we had additional inventory gains, you know, above and beyond normal, we also had very high operating expenses, particularly overtime and temporary help. And those are dropping at a pretty good rate right now. Unfortunately, not as fast as we would like to see it drop. So will that balance each other out? I'm not sure. But we're not expecting that in our guidance for them to balance out. We're expecting to have a couple quarters at least where our inventory gains are not as good as last year. But I want to stress that that is in our guidance.
spk05: Great. And just to follow up on the guidance, I mean, you've had a very nice beat in the first half of this year versus how you initially thought the year would play out. The back half, I guess, along the way, you know, you really kind of have it touched. I'm just kind of curious as to, you know, how you're thinking about, you know, the business now going forward versus sort of like what your initial expectation would have been. I thought I heard you at the beginning of the call when you talked about this acceleration in January. I thought I heard a little bit of a tone of optimism, I guess, about moving forward. You know, so maybe you could sort of wrap that, you know, into how you're, you know, I guess, really feeling about, you know, the business now moving forward in the back half and then as you progress into the next fiscal year?
spk08: Yeah, well, you know, everything we hear concerning the macro can be confusing, but all in all, you know, the industry is not doing real great right now, so we figured that we're better off to be cautious about what kind of guidance we give for the second half of the year. A little bit to do with the inventory gains, you know, not as much, but January, the thing about January in our industry and certainly in our company is, you know, we've had really good Januaries and just had average Q3s and we've had bad Januaries like last year and ended up actually with a good Q3 because about half our earnings occur in March. So yes, definitely an optimistic January, very optimistic actually in all of our businesses. The first week of February, if you exclude the parts of the country that were really negatively impacted by weather, also very good. I look back at last year, and it seemed to be that Valentine's week when we started to really improve, and March was a fantastic month, so, you know, much more difficult comparison. So that's it in a nutshell, Ed. We're just trying to make sure that, you know, we're giving... guidance that we have a strong belief in.
spk13: Excellent. Thank you. Appreciate it. Thanks.
spk11: And we'll take our next question from Jake Bartlett with Trif Securities.
spk22: Great. Thanks for taking the question. Mine was just on digging into the strength that you've seen in January and just this the underlying momentum of the business. I'm wondering whether you could frame that in terms of pre-COVID, the three years. As I look at what you've reported for organic independent case growth, there was a slight acceleration on the independent organic growth versus 19. And so I'm just wondering whether that's accelerated. I calculated roughly 20% growth. And so wondering whether it's actually accelerated in January, just so we can kind of take out the noise of Omicron.
spk08: That's why we mentioned earlier that we were encouraged by January. I mean, once again, it's January. But yes, there was an acceleration over the fiscal 19 numbers. It wasn't as extreme as the acceleration over fiscal 22 numbers. And even our Q2, where we were slightly less than Q1 for independent growth, we were ahead of it going into those last two weeks of the quarter. Something that happens once every seven years in our business is that the holidays fall on a Sunday, and it wipes out Saturday night, which is typically a very good night. So even though I'm sure for restaurants this Saturday night New Year's Eve was real good, but Saturday night's good whether it's New Year's Eve or not. So we expected that. It was probably a little bit more than normal, but it's just one of those things that happens in our business. So we feel from Q1 to Q2 that we did have a slight acceleration, but from Q1 to Q2 versus the share numbers we get, we had a nice acceleration. So I think when we look at kind of that three-year stack, I think is what you're referring to, you know, fiscal 19 to fiscal 23, we feel excellent about that.
spk22: Great. That's really helpful. And then I'm wondering, in terms of the sales guidance for the third quarter, you know, at the midpoint, it's a little bit down from the second quarter. Historically, it looks like convenience has a seasonally weaker trend. you know, third quarter. If you can frame whether that slight deceleration at the midpoint is due to more seasonal factors or if that's reflecting, you know, some of the challenges that you're seeing on a macro basis, trying to kind of judge whether, you know, there's some kind of unusual deceleration there or whether it's just more seasonal.
spk08: Yeah, all of our businesses, the third quarter is typically the lightest revenue quarter. But also a big impact, too, is tobacco is really declining at a pretty heavy rate right now, which all in all is not a bad thing. It's not a big margin producer, but it certainly has a big impact on the top line. And I would say that's probably it. Our national account growth, where I had mentioned, I think it was two calls ago, by fiscal third quarter, we'd be running growth. I'm not so sure that's going to happen. We've played out from an account standpoint exactly as we had wanted it to go, but there's some real softness in that account base. So that's probably a little bit of it, too.
spk22: Great. Thank you so much.
spk11: And we'll take our next question from John Heinbuckle with Guggenheim.
spk19: So, George, I want to start with why do you think independent case growth is less than new account growth, right? And within the context of that, your thoughts on salesperson bandwidth and capacity, right? Because they're doing a lot more volume than they did three years ago. Where are we on that? And do you think you need to grow the sales force faster now? to see a pickup and independent case growth?
spk08: Well, I think that the biggest thing in the accounts growing faster than the cases, part of it may be, you know, we have a, I think we always have an emphasis on new business, but we've had a little bit more of one than typically because we're finding that at the customer level that we're doing, on average, less business than we were doing the previous year. This is on average with our customer base and independent. Yet, we're selling them slightly more SKUs than we used to sell them, so that just shows that, you know, the volume down at the account level. Now, January, a lot of the improvement was new accounts, but we also had improvement in penetration within the accounts. We actually were positive in the month of January, and that's why I think Part of our increase has been due to the Omicron the previous year. Then as far as salespeople, we have made big investments in the last couple quarters. I had mentioned before that we've kind of gotten behind. Right now, our percentage increase in number of salespeople is the most we've had in several years.
spk19: Okay. And maybe for Patrick, you know, given your closeness with Vistar, right? So Vistar profitability, at least this period, with several hundred basis points above where it had kind of been running. Thoughts on the source of that? And then where do you think, right? It looked like it was settling in maybe in a 5% to 6% range, which was higher than pre-COVID. Is that still sort of where we're settling at, or maybe it's higher than that now?
spk08: No, I'm going to go ahead and take that. John, just because needless to say, Pat's been very busy the last quarter.
spk19: Okay, yeah, sure.
spk08: Good. Our return on sales or our EBITDA margins in Vistar has always been more volatile than us as a company. And I've explained this before, but I think I should do it in a little bit more detail. We have parts of our business in Vistar that have very high case costs. Very low gross margin, very low expense ratios, and low EBITDA margins. We have parts of our business that are low case cost. They are high margin, they are high expense ratios, and they are high EBITDA margins. Then we have our pick and pack business where there's a lot of eaches out of those particularly the three distribution centers totally dedicated to that. And that is high margin, high expenses, high EBITDA margins. Then we have a fulfillment business, which we feel we're going to show some real growth in a couple quarters with. But there, we do not get involved in the accounts receivable on that product. We're fulfilling those orders ourselves. most often for the manufacturer or the online site. So all we're billing is our fee. So there is extremely low case cost average, and almost all of it is margin. So it has extremely high margins. And then inventory gains can change quarter to quarter based on what kind of job we did of anticipating increases. So there's a lot of volatility in there, and there's a lot of volatility in the EBITDA margins. But when it comes down to how we do as far as the percentage of the world's profit dollars that we put to the bottom line, it's pretty stable. And, John, I don't see that changing. Actually, I would like to see our fulfillment business become a much bigger part of our business.
spk13: Okay, thank you.
spk09: Thank you.
spk10: And we'll take our next question from Alex Legle with Jefferies.
spk17: Thanks. Good morning. Just following up on the previous questions with the restaurant industry traffic seemingly still subdued. I'm wondering if you could talk about your incremental efforts to drive an acceleration in the new customer wins and in independent business and what you're doing to drive that does sound like ramping the sales force a little bit more and maybe any comments on how you're incentivizing your sales force or other levers to drive further acceleration in that.
spk08: Yeah. You know, we really we don't offer up promotional activities that are national or things that we go to our people with. It's really all around growing our sales force. And we've always found that if we're doing the right training and we're hiring the right people, that we're going to grow our business faster than we grow our sales force. And it's pretty simple, but that's how we look at it. And I think that we've been able to hire some good people of late. We got some intense training going on. A lot of them have already been cut loose and we're ready to let them all cut loose.
spk09: I guess it's just no different than that.
spk17: Got it. And then just on productivity and your efforts around matching your staffing levels to the volumes, which have been seemingly more volatile and hard to predict. just kind of seeing if you see any opportunity for improved tools or processes or anything you're working on to help drive better productivity here. And hopefully the volume trends do stabilize some more into February and March. But any thoughts there?
spk08: Yeah, Patrick's going to take that because he's much closer to what we're doing there.
spk03: Yeah, Alex, thanks for the question. So first of all, when we think about labor, know we've been really pleased it's been slow but it is improving and when i think about what's going on in the field and our leadership in the field and how they're working every day on the hiring and retention and training of our warehouse and drivers again we're really pleased with the progress they're making it's slow and it's slow because the one area that we want to continue to see more improvement is on retention but because of their success so far we really have seen the temp labor come out of the system for the most part. And we're also seeing overtime reduced. So as George mentioned earlier in his comments, we really think that, you know, while it may not match up perfectly, but over the next several quarters, this is going to be, it has been a headwind, but it will become a tailwind. It'll help offset some of the comping that we're going to have to do with these inventory gains. So we do see this as a positive going forward, and we're really pleased with the progress we've made to date.
spk13: Great. Thank you.
spk11: And we'll take our next question from Mark Carden with UBS.
spk20: Good morning. Thanks a lot for taking my question. So to start, it sounds like you guys have made some really nice progress on fill rates. Presumably on the inbound side, it's picked up a bit across the industry. Given that, have you seen any smaller competitors taking any more aggressive efforts to maybe win back some of the share that they might have given up when inbound fill rates are more challenging? Do you see that being much of a risk, or has the new business that you've gained really just proven to be pretty sticky?
spk08: You know, I think that nothing's really changed from the competitive landscape. There's probably a little bit more activity going on as far as short-term procuring of an account, you know, or picking up some business with an account. But, you know, we've done some of that ourselves in the past and it seems to do exactly that. It works pretty good short-term and doesn't have an impact long-term. So, you know, we're just kind of continuing to do business the way we do business and price the way in which we price. And we really haven't seen any difference in the marketplace.
spk20: Okay, great. And then as a follow-up, it sounds like overall some nice progress on new business, good markets are going overall. How about from a category perspective? Are you still seeing strength really across the boards in independence? Do any categories in particular stand out? Just what you're seeing on that front.
spk08: Yeah. You know, casual dining, obviously, you know, the chains, I mean, a lot of Republican-based season numbers not doing real great. But the casual dining independent seems to be doing really well, and that's been a good part of our growth. Pizza has definitely slowed down in the last year, but we're continuing to gain share, and we're very excited about that business. Hispanic seems to be doing real well. Although we don't play hugely in fine dining, fine dining seems to be doing well. And, you know, center of the plate has been a big hit for us. I mean, our margin growth has really been around our change in mix, just in mix of customers, mix within our channels. But product mix has been a big contributor to that, too.
spk09: Some of our highest profit per case items have been where our growth has been good.
spk13: Thanks so much. Good luck. Thanks.
spk11: And we'll take our next question from Brian Harbor with Morgan Stanley.
spk16: Yeah, good morning. Thank you. Is there any way you're able to quantify kind of the impact of some of the business that you said you had exited? And then just kind of to the point you just made, is the softness more on the casual dining side that you've seen in the most recent quarter or anything else that you would call out there?
spk08: Yeah, I would say to answer your last question, I would say casual dining is where we're seeing the most slowness. As far as exited business, I think there's different ways to look at that word. It's extraordinarily rare for us to tell a customer we don't want to do business with them anymore, very, very rare. By exited, we've gone and we've had to get a higher price to be able to handle that business, and in some instances, the customer isn't willing to do that. And we've been in a position, I've mentioned this probably, this is probably the third call, but maybe too much. But, you know, when you have excessive overtime and you have an excessive amount of people who are temporary, you can have business that's typically maybe marginally profitable with a good return on capital that becomes unprofitable. That's the position we were in. We just didn't pursue some business as heavily as we would in the past. We think we're getting there where maybe we can be a little bit more aggressive, but there's still a high cost that we're dealing with. I guess to bring on business that It's going to be difficult to grow if they're not growing. That's why I've seen some real flatness or declines in our national account business. And our focus is just, I mean, we like those type of business and we like all business and we like those customers. But for us, our focus has had to be really, really heavily on independent. And I will also say that we've also had Cormark grow in it mid-teens in their non-tobacco business, and that's been a nice contributor for us for growth.
spk16: Yeah, it makes sense. Okay. And could you remind us where just kind of your own brand penetration is and how that's kind of driven some of the margin performance that you've seen recently?
spk08: You know, that's one of the best things we have going for us right now. You know, we just finished a month where it was 51.9% of our independent business And it's just not a number that, quite frankly, I expected us to get to. So it's been really good. And almost, I mean, really close to all of our branded business goes to independent restaurateurs. So we're real focused on that. It's doing well. Customers seem to receive it well.
spk13: Thank you.
spk10: We'll take our next question from Jeffrey Bernstein with Barclays.
spk02: Great. Thank you. George, you mentioned in your prepared remarks the more stable landscape to start calendar 23. I think you alluded to it being beyond just the favorable January compare bounce. You've also noted that the industry is not doing really well right now, so I'm I was trying to just contextualize because it seems like most of the chains we talk to are talking about surprising resilience in the business and the consumer and whatnot. So I'm just trying to bifurcate between the more stable landscape relative to the industry not really doing well right now. And then I have one follow-up.
spk08: Yeah, well, you know, what we get from third parties showed that the industry is in a very, very slow. I mean, talking like not single digit, single point growth. I get the same conflicting things, Jeff. We have chains that are doing really well and are excited and don't know there's a downturn going on. And we have some that are really struggling.
spk09: And I think it's that mixed up a bag.
spk08: And one of the reasons that I guess that we use the word stable is that we've been in this period of time where we've had single-digit lost business, and that's something that we always had as a goal and could never quite get to. So that's accounts that we sold last year and don't sell this year, so either they went out of business or we lost the business or something happened. And that's a stability that we haven't had in our company to that degree before.
spk09: That's where that word comes from, I guess.
spk02: Understood. And then just on the... the commodity inflation or less of it. Sounds like you're expecting continued easing. Just wondering where you think that goes, whether we'll be talking about low or mid single digit inflation over the next quarter or two and thoughts on whether or not that could turn to deflation. I know most have not conceded that that was really very likely, but just wondering how you'd change or how you'd manage your business differently if that inflation eased more quickly and actually turned to deflation. Thank you.
spk08: Yeah. Well, um, where we still have a fairly high inflation is in Vistar still in, in Cormark, not as much, but, but some inflation, we don't concern ourselves with deflation there because, uh, they typically raise their price in the same pattern all the time and they fight hard to get their prices increases in. And, uh, you just don't see them back off. So I think that's stable. They may skip some price increases or something like that. It certainly could happen, but deflation, no. In our food service business, particularly our independent, that's where we really watch at the closest. Right now, we're seeing our case growth and our pricing almost converging. so uh and and that's real recent so that doesn't mean that there can't be something within our mix that we'll see as we do our inflation numbers at the you know at the end of the the quarter but i i think that inflation is is right now appears to be headed in our independent food service business for very low single digit and as far as uh Deflation, I think we're set up to handle that well. We didn't handle it so well when it happened back in the Great Recession, but we've got some good systems in place and a more experienced sales force, and we feel fine with it.
spk13: Understood. Thank you. Thanks.
spk11: We'll take our next question from Kelly Bania with BMO Capital.
spk00: Good morning. Thanks for taking our questions. George, I wanted to go back to something that you said at ICR about the comment about renegotiating terms with most customers, I think almost every customer, and I believe that's on the contract side. And that's pretty consistent with what we hear across the board, but I was just curious if you can help us understand the changes in the way that the contracts are structured and negotiated today versus maybe a few years ago and how that may impact the future of the business, how the business performs in the future. And I guess I'm particularly just curious if there's any changes or ways that we should be modeling as we transition here from this higher inflationary environment to a possibly lower inflationary environment.
spk08: I don't see, at least within our world, that there's really any changes in how they're structured. You know, we just needed to get most of that as a fee business and we needed to get a higher fee because of our expenses. And, you know, we tried to do a good job of making sure that we were recouping what we felt were kind of those long-term expenses. Obviously, you know, the operating expenses that we had through the severe part of COVID is not something that you want to pass on to a customer. You're just going to cause yourself problems down the road. But we were fairly successful. I would say very successful. We have a good customer base. And where we weren't successful, we lost some business. And that's just the way it goes. But no, I just don't see a big change moving forward. And as If we go through a deflationary period of time, those customers will benefit from lower costs and they'll probably in the end be good for our business, good for our industry.
spk00: Okay, that's helpful. And maybe just to follow up on fill rates, very helpful color there. I think you gave us for food service and Vistar. Just curious if you have a sense of how you think those compare both on the inbound and outbound metrics. to the rest of the industry and your competition?
spk08: You know, we don't have a good feel with that. I mean, I guess the only thing that we get is, you know, the complaints from customers around fill rates have gone down and gone down a lot. Our food service, we're almost back to normal, very close. Cormark and Vistar are still struggling more with inbound. And what I look at, because it's hard to judge in this type of environment, or has been hard to judge, is what our inbound rate is versus our outbound. And are we converting the inbound to a better outbound at kind of a percentage standpoint, what we used to when the supply chain was normal? And we've been able to do real well there. So I would say that we're probably at least at a par with the industry in I think it helps, too, that we have purchasing people at each of the distribution centers, and they're really tied tight to the sales force and many of the customers, particularly the larger customers, and I think that's helped us.
spk13: Thank you.
spk10: We'll take our next question from Lauren Silverman with Credit Suisse.
spk11: Looks like they have removed themselves from the queue. We will take our next question from Andrew Wolf with CLK.
spk12: Thank you. Good morning. I just wanted to ask you to perhaps tell us a little more about your views and outlook on labor productivity. So what I've heard from what you've been saying, George, sounds like labor costs are coming down. maybe on an hourly rate as you substitute in sort of normal labor for some of the expensive labor you've had to bear. But what are the trends looking like with labor productivity, given it sounds like you might be early on still training people? And what is the outlook for labor productivity? And where does it need to improve more? It sounds like it might be more of still a warehouse issue than a delivery, which sounds like it's improving more rapidly.
spk08: Well, it needs to improve everywhere, but I'm going to kick that one to Pat. He's closer to it.
spk03: Yeah, I mean, it's a good question. As we talked about a little bit earlier, I mean, I'll expand upon my previous answers. Just, you know, we have some great systems in place. So once we get the people into the warehouse, once they're trained, we have great systems that allow them to be very, you know, have very efficient productivity. Where I mentioned earlier, it's a retention thing. And this is, I think, it's not a PFG issue. It's a broader industry issue. But we are starting to see some really nice progress, as I mentioned earlier. So the team's doing an excellent job of recruiting and getting those folks into the buildings, getting them trained. And again, we think that over time, this is really going to become more of a tailwind.
spk12: And Short of as, you know, everybody's until recently been using 2019 or actually still using 2019 as a metric, you know, to look at sales productivity. Are you also doing that, you know, some kind of pre-COVID normal for labor productivity? And, you know, can you give us a sense of, you know, how that curve is going to look in terms of the improvement over the next year?
spk03: Yeah, I mean, we absolutely look at pre-COVID numbers as well just to make sure that we're measuring to what we'll call a sense of normal back then and then how does that compare to today. I can't give you any indication of how quickly we'll move down that curve because, again, there's so much uncertainty around labor, but it's something we're very focused on, I can tell you that.
spk13: Okay, thank you. That's it for me.
spk10: And we'll take our next question from William Reuter with Bank of America.
spk04: Good morning. The sequential commentary about your inventory gains over the last year and which are the toughest comps was very helpful. I was wondering if you could share the magnitude in totality of these gains on an LTM basis, because it sounds like you think that largely these are going to be offset with productivity savings. So trying to get a sense for what you're expecting on that.
spk03: Yeah, this is Patrick again. So again, just going back a little bit, you know, we started to see these inventory gains in 3Q22, and then they stepped up in 4Q22, and then again in first quarter of 23. And as George was just mentioning, in this quarter, we actually saw year-over-year gains. We were comping negative. We can't really quantify with you today about what that totality of that is. But and as George mentioned, we're not even sure that the productivity gains that we will see will completely timing wise offset these inventory gains. But we're both, you know, there's a lot of opportunity on the productivity side. And we have in our outlook, you know, said that we anticipate inflation to continue to decelerate. I know we will see these inventory comps get tougher, but again, all that's baked into our guidance.
spk04: Okay. And then you've been focused on debt reduction of late. Your leverage is now kind of within your target range. Are you at the point where you would look at additional M&A or do the higher interest rates in the current environment kind of discourage this activity?
spk03: Well, yeah, as you mentioned, we are within our leverage range, and we're obviously very happy about that. Again, we reduced our leverage to 3.3 in the quarter. When we think about our use of the cash, we're certainly, as I mentioned, focused mostly on investing in the business and building our capacity to support the growth of the business. We're always looking at strategic M&A. So I'll leave it there unless George wants to add anything to that.
spk08: Well, you know, we've always been opportunistic acquirers, and I would say that we always will be. So that, you know, something could happen there. We don't have anything that's actionable right now. But paying down debt, you know, that's important to us. So is adding capacity. We would rather reduce our leverage by having more earnings as opposed to reducing anything for that matter. We want to grow. And fiscal capacity, I would say that's probably the most important thing to us today, but we'll always be an opportunistic acquirer.
spk13: Great. That's all for me. Thank you.
spk10: Thank you.
spk11: And we'll take our next question from Joshua Long with Stevens, Inc.
spk06: Great. Thank you for taking my question. Curious if we could talk about just the overall strength of the supply chain. It seems like things would be improving. You mentioned a couple times different improvements in fill rates overall. But just curious if you could contextualize just the overall strength of the supply chain. And then when we specifically talk about some of those fill rate comments, How do you think about that? Although the fill rate percentage is up, what does that look like in terms of the number of items or the assortment versus pre-pandemic? Is that even an important point in the current environment?
spk08: That's a good question. I think the supply chain is strengthening pretty quickly right now. I think we learned a lot going through COVID. It was a fine-tuned supply chain, particularly when you got to to perishable product. And when something that is that fine-tuned gets disrupted, it gets disrupted overnight, and it takes a long time to correct. And as I said, our food service is getting pretty close to normal. One of the issues with our fill rate in Vistar and in convenience is that many items just weren't produced any longer. and the customer continues to order it. And we're seeing many of those items come back online. We're also seeing that suppliers that were in both the retail and the food service business and maybe bigger in retail, and they had all they could do to pack the product, really discontinued many food service items and didn't have the level of attention to it. And as a percentage of the food being eaten has swung back greater and greater towards food service, we're seeing those people come back online. I will say it's hard to go running back when you've had to find other sources, but they are coming back. So I would call the supply chain as something that's Not there yet, but we're seeing really good improvement. And the number of items, by the way, that's something that we follow real close by distribution centers, the number of items that they sell on a weekly basis. And most of our companies are still selling less items due to availability, but it's improving at a pretty quick rate.
spk06: That's helpful. Thank you for that. And maybe bigger picture, when we think about just contextualizing the holistic strength of the business in terms of case growth, new customer wins in ads. It's impressive. I imagine there's also a good bit of investment that happens behind the scenes in terms of capacity, warehouse, not just on the Salesforce side. Can you talk about that and maybe how you feel like you're positioned to sustain or support continued growth at these levels going forward?
spk03: That's a good question. And as we talked about just in the last six months, we've invested $98 million in CapEx. And when we talk about our priorities, that's really the number one priority is to continue to invest in the capacity of the business to help it grow. As we just mentioned, another priority is also reduced leverage. But the number one use of our cash is going to be continue to invest in the business. And given the results of the three segments and their strength, we're going to continue to do that because they're doing some really nice job of generating some really solid growth.
spk13: Thank you.
spk11: We'll take our next question from Carla Casella with JP Morgan.
spk21: Hi, thanks. It's Carla Casella from JP Morgan. You made some good progress paying down Revolver this quarter. I'm just wondering if there's any I mean contemplated in your kind of leverage and targets going forward, is there any thought that you could be out of that facility by year end or a target of when you want to be out of that facility kind of given the high cost of rates today?
spk03: Yeah, thank you for asking that because there's a couple things I wanted to share. As we mentioned in our comments, you know, because we use interest rate swaps, there is a portion of the ABL that is floating, but because we use swaps, 76% of our total debt is fixed. And the ABL is at a very attractive rate of LIBOR plus 125 bps. So yes, interest rates are certainly going up and we're watching that very closely. And the portion of our ABL that is floating does move up accordingly. But we've done a really good job of managing that interest expense. So there is no expectation at this time that we would be looking to retire that facility, and we'll just continue to manage the interest rate environment the best we can with those swaps.
spk21: Okay, great. Thanks.
spk10: We'll take our next question from Peter Salane with BTIG.
spk18: Great, thanks for taking the question. I want to come back to the conversation on the food service and the restaurant space. You know, George, you mentioned that pizza has slowed in the past year, yet fine dining is still doing pretty well. Do you feel like this is, you know, the lower income consumer kind of pulling back? Just any, there's been a lot of conversation and concern around that in the industry. Just wondering your thoughts on
spk08: on the consumer uh in that environment uh that's a hard one you know uh qsr appears to be doing quite well we do very little of it but it appears to be doing quite well uh i think with pizza i think that as there's been more options for the consumer they've consumed less pizza i think there was i heard the term pizza fatigue but you know there was you know they did so well through the COVID period of time. So I probably don't have, you know, a real good answer for you on that. I guess the way to put it is lower end consumer. You know, we do a lot of value store business out of Vistar and, you know, that business is doing well and would probably be doing a lot better if there was more product availability. So that is a sign that, you know, people are are kind of going down the chain a little bit. So I would guess I would call it mixed.
spk18: Appreciate that. And just a housekeeping question here. I think you mentioned food service inflation was about 9.6%. Can you give us that number, what it was last year at this time, and maybe on a three-year basis? That would be helpful.
spk08: Thanks. Yeah, we don't have that number. We can get it and have Bill get that to you. But I would want to comment that, you know, that was what we did last quarter and that we have seen a pretty significant deceleration in the last five weeks since the end of that quarter in food service.
spk13: Thank you.
spk10: We'll take our next question from Fred Whiteman with Wolf Research.
spk07: Hey guys, thanks for the question. I just wanted to come back to some of the cost benefits that you guys highlighted from the lower temporary workers and overtime. If we go back and look at some of the prior disclosures that you've provided about some of those one-time costs, were those numbers only the temporary labor force or was that the combination of the temp labor force and the higher overtime?
spk03: Yeah, thanks, Patrick. Those comments, those prior comments, are really around the temp labor force, and we were just highlighting because they're unusual.
spk07: Okay, and then as we just think about the sequencing of those potential benefits going forward, if we look in 4Q of last year, you guys had started highlighting year-over-year benefits from lower temp workers. So how does that sort of piece together with the ability for some of these lower costs to offset some of those inventory gains or the headwinds from lower inventory gains that you're facing here for the rest of the year?
spk03: Yeah, I think the best way to think about it is I think we have said that a lot of that temp labor has come out of this system. What we're focusing mostly now on is the overtime that we still have in the system, which is, again, just a function of us being able to hire enough workers and retain those workers. The productivity improvement that we're still really looking to see the biggest benefit from is the efficiency that you gain once you've had an employee in the role for a little bit of time and they really start to generate some good efficiencies in that role. So that's the next step, and that's what we're looking towards.
spk07: Perfect. And then just lastly, you touched on the private label penetration and independent specifically, but what is the outlook for that penetration just given easing inflation and then also some of the higher fill rates that you're seeing from your vendors? Do you think that'll hold steady? Can it continue to grow? Or maybe you guys are not penetrating that because of costs. What is driving that, I guess?
spk08: Yeah, that's a good question, but a hard question. You know, we have... a handful of opcos who are in the 60% or over 60%, low 60s. So I guess I could say that that's a possibility, but I will admit that I didn't see us being at 51.9 now. One of the things that has definitely helped us, we keep track of our inbound fill rate for our brands and our total inbound fill rate and our inbound fill rate was significantly better all the way through COVID on our brands. Our suppliers really stepped up. So as the other suppliers have better fill rates, will that affect it? And I got to tell you, I really don't know. I think what I would say to you is that I'm really pleased with the percentage of our business that's our brand. We certainly... like selling product that isn't our brand as well, and that can be quite profitable for us. You kind of develop a better sense of loyalty, but it's the customer that matters. But when they provide you much better inbound service than, I guess, the other guy, I think it's going to continue to grow for us. I don't know that we'll have kind of the outsized growth that we've had the last few years. Makes sense. Thanks a lot.
spk11: And we'll take our last question from Lauren Silverman with Credit Suisse.
spk15: Thank you for fitting me in. So just a follow-up on the food service inflation. Ask a different way. Is your total cost basis staying relatively steady while year over year is moderating, or are you seeing that total cost basis declining as well?
spk09: It's moderating. It's not, it's still elevated, but it's really moderating.
spk15: Okay, got it. And then just to follow up on the independent customers. So understand new customer acquisition is really the focus area. How important is new restaurant openings for your customer acquisition goals? Or is there really enough opportunity and large enough addressable market and relationships that you don't have currently? that year-over-year positive unit growth in the restaurant space isn't as important.
spk08: Yeah, we don't track that, unfortunately. We probably should. I think it's probably been new customers. It's probably been more important in the last year, certainly, as you think about these buildings. They're, for the most part, single-purpose buildings, and if somebody went out of business It would be rare to see somebody other than another restaurant come into that building. So I would say it's probably been more important in the last year. But the rate at which you really need to grow your new customers to put the growth out that you need, you have to get existing restaurants on board. I think that's really important. I wish I had better numbers for you, but we just don't track it separately.
spk15: Thank you very much.
spk11: Thanks. It appears that we have no further questions at this time. I will now turn the program back over to Bill Marshall for any additional or closing remarks.
spk01: Thank you for joining our call today. If you have any follow-up questions, please contact us at Investor Relations.
spk11: That concludes today's teleconference. Thank you for your participation.
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