Performance Food Group Company

cost control drove double-digit profit growth and very strong cash flow in the quarter. This allowed us to invest behind growth initiatives and pay down debt, preparing us for the future and improving an already strong balance sheet position. In June, we laid out three key strategic priorities, consistent profitable top-line growth, adjusted EBITDA margin expansion, and leverage reductions. I am pleased with how our organization has internalized these initiatives and made rapid progress on all three. We are achieving these goals with contributions from each of our three reportable segments. In a moment, I will highlight the success in each of these units and discuss why we believe we are well positioned to grow our business and deliver significant shareholder value over the long term. As you saw in our press release this morning, our adjusted EBITDA in the fiscal third quarter was, once again, ahead of our guidance. As a result, we are raising and tightening our adjusted EBITDA guidance range for the full year. In a moment, Patrick will provide additional details on our financial performance and outlook. Our financial success in the fiscal third quarter was achieved despite decelerating inflation in the food service business. Over the long term, we believe normalized inflation is healthy for our company, our customers, and consumers and look forward to a period of stable low single-digit inflation. This will bring back the market to a more typical operating condition. In the meantime, we have been able to offset a lower inflation benefit through market share gains within highly profitable channels, rapid growth in high margin products, and disciplined cost controls. We're very pleased to see our organic volume growth accelerate in the fiscal third quarter. This reflects strong market share gains in the independent restaurant channel, solid growth at Vistar, and consistent progress selling food and food service into the convenience channel. It is not a coincidence that each of these areas are also where we generate the highest returns, best profit margins, and significant operating cash flow. There are several factors helping our improved volume performance. In addition, To our typical best-in-class sales and service levels to customers, we continue to see a tailwind from improving inbound and outbound fill rates, particularly at Vistar and convenience. Food service fill rates are essentially back to normalized pre-pandemic levels. As fill rates at Vistar and convenience continue their steady march forward, we would expect it to support further volume gains. Let's review several highlights from each of our reportable segments, and then I will provide my thoughts on the current environment. As I mentioned earlier, we were very pleased with the progress in our case growth during the fiscal third quarter. In food service, this was led by our independent business, which saw organic case growth of 8.3% year over year. Some of the outperformance was certainly due to the benefit of an easier comparison due to the Omicron impact early in the third quarter of last year. However, we were encouraged by the resiliency of independent case growth, in March when comparisons were much more difficult. As we discussed in the past few earnings calls, our independent case growth has been driven by new accounts more so than increased penetration in existing accounts. This trend continued to a large extent in the fiscal third quarter, though we did see an increase in cases per account year over year. With that said, new account growth was even faster in the fiscal third quarter than it had been in the prior two quarters and was just behind total case growth. Rapid growth in total new accounts coupled with year-over-year increases in cases per account should be a strong combination for our case growth in future periods. This is also reflected in our market share momentum, which remains robust. Our data shows consistent market share improvement in the independent channel, both on a case and dollar basis. As you know, we define an independent restaurant as an operator with fewer than five locations. We have remained consistent in this definition. We are very pleased with the progress the food service team has made with our independent restaurant business, which goes beyond the headline case growth numbers and includes solid factors underpinning that growth, which we believe will produce long-term gains. This is not only profitable to our bottom line, but good for the long-term positioning of our food service segment. Moving to Vistar, the segment has continued to perform well over the past several quarters. The third fiscal quarter of 2023 was no exception, as Vistar reported nice revenue gains and adjusted EBITDA growth versus the prior year period. Vistar's success was broad-based with double-digit case growth in vending, office coffee, theater, and concessions. There are several factors driving this success, including continued recovery in several of these channels, as consumers increasingly revert to their pre-pandemic behaviors. We're also seeing a nice lift from improved fill rates, as I mentioned in my earlier remarks. This is encouraging, as the benefit is already being recognized, despite fill rates still below historic levels. As the supply chain moves closer and closer to healthy fill rates, we expect the case and dollar sales lift to persist. Pistar is an important growth area for PFG, not only contributing to our sales momentum, but also accretive to our profit margins and returns. We are optimistic that Vistar will benefit from the combination of continued channel recovery and organic growth into existing channels, along with entry into new channels. Our push into the convenience channel continues unabated with another quarter of double-digit food service sales growth. We are particularly pleased with the pace of profit growth and convenience driven by strong results from higher margin products, along with like for like margin improvement across both nicotine and non nicotine businesses. As we've discussed with you in the past, the sales cycle for the convenience business tends to be long, however, we have a stable pipeline of new business opportunities. which we expect to drive sales and profit growth over the long term and produce nice shareholder returns on our investment in Coremark. Before turning it over to Patrick, who will provide additional detail on our financial results, I wanted to briefly discuss the recent inflation trends. As expected, we have seen inflation rates move lower month by month. On a consolidated basis, the pace of disinflation has been roughly in line with our model, which is the basis for our guidance. However, there has been divergence segment by segment. Inflation in food service has fallen quicker than anticipated, while Vistar and Convenience have continued to experience persistently elevated year-over-year inflation rates. We feel very comfortable with our businesses' ability to manage through the environment, demonstrated by our strong third quarter results. Over time, we would expect food service inflation rates to stabilize in a more normal, low single-digit range, with this starting convenience inflation rates beginning to move lower over the next few quarters. In summary, all three of our reportable segments had an excellent start to the calendar year, finishing our fiscal third quarter with strong volume momentum, favorable profit mix, and tight cost controls. This led to a strong bottom-line result, very solid cash flow generation, and continued progress fortifying our balance sheet. I'll now turn the call over to Patrick, who will provide additional detail on our financial performance and outlook for the future. Patrick.

Thank you, George, and good morning, everyone. As George discussed, we had an outstanding fiscal third quarter, making progress on our three main objectives and putting our business in a position to drive shareholder value over the long term. Once again, our adjusted EBITDA result came in above our guidance, resulting from better than anticipated gross profit performance tight operating cost controls. As a result, we are raising and tightening our full year adjusted EBITDA guidance range. I will walk through our guidance in more detail shortly. We are also very pleased with our organization's ability to convert these profit results into cash flow. Operating cash flow generation provides us the flexibility to invest behind value creating growth projects, which we believe will produce sustainable revenue growth in the years ahead. Meanwhile, we have used our excess free cash flow to reduce our outstanding debt on our ABL revolving credit facility. That coupled with our adjusted EBITDA growth moved our leverage to the midpoint of our target range. Let's walk through a few specifics on our cash flow and leverage. Through the first nine months of fiscal 2023, PFG generated $657.2 million of operating cash flow. After accounting for $177 million of capital expenditures, PFG generated $480 million of free cash flow over the past nine months. We are very pleased with this cash flow result, which reflects strong cash generation during the fiscal third quarter. Our operating and free cash flow is up significantly compared to the prior year in both the three and nine month periods. This is a testament to our strong underlying fundamentals along with disciplined working capital management. We have also stepped up our capital expenditures to match the current and future growth prospects of our organization. Much of this spending goes towards building new capacity to support long-term growth across all three reportable segments. These facilities are equipped with updated equipment and technology, making our business more efficient in addition to supporting our rapid growth. Over the past nine months, we've paid down our ABL facility by about $380 million. As a result, at the end of the third quarter, our leverage ratio was 3.0 times net debt to adjusted EBITDA on a trailing 12-month basis. Our leverage is now right at the midpoint of our 2.5 to 3.5 times target range. At the end of our fiscal third quarter, about 79% of our outstanding debt was at a fixed rate, including swaps we have in place against a portion of our floating rate ABL facility. We believe this is a very healthy position, particularly given the interest rate environment today. We expect to continue to manage our leverage within our target range while keeping optionality for potential M&A and other value-creating activities. I want to take a moment to update you on our digital ordering platform, Customer First. As a reminder, Customer First is our new digital platform designed to provide customers across our businesses with a better online ordering experience. we have made significant progress in the rollout. At this time, 90% of food service locations are in some stage of deployment, and 100% of Vistar locations have access to customer first. We expect this platform to result in increased order sizes, improved customer retention, and generate new business wins. It also leverages the entire PFG platform and is expected to generate cross-selling opportunities. Feedback from the customers using the platform has been very positive, and we continue to convert accounts. PFG has expertise across food away from home channels, and Customer First allows our organization to unleash that potential. We are very excited about the progress we have made and expect much more to come. With that, let's quickly review some highlights from our fiscal third quarter. PFG total company net sales increased 5% in the third quarter to $13.8 billion. Our net sales performance was driven by strong case growth, somewhat impacted by lower levels of year-over-year inflation in food service. Total organic case volume increased 3.1% in the third quarter, driven by growth of independent restaurants, performance brands, as well as gains in Vistar. Our total case growth was an acceleration from the prior two quarters, where organic cases were flat for the total company year-over-year. Organic independent cases were up 8.3% in the fiscal third quarter, again, an acceleration from the prior two quarters when organic independent case growth was in the mid-4% range. Outperformance in independent case volume continues to reflect market share gains and new business wins in that important high-margin business. Total PFG gross profit increased 12% compared to the prior year quarter. Gross profit per case was up about 55 cents in the third quarter compared to the prior year period. In the third quarter, PFG reported net income of 80.3 million and adjusted EBITDA increased 32% to nearly 315 million. Inflation continues to impact our business and continue to moderate due to lower year-over-year inflation in the food service segment. Total company cost inflation was 7.2% in the quarter, This was the first period with single-digit inflation since the first fiscal quarter of 2022. The deceleration was driven by our food service segment, which experienced 3.5% inflation in the fiscal third quarter. Fistar inflation remained at the mid-teen level in the quarter, while convenience experienced another quarter with inflation just above 10%. Once again, inflation for both Fistar and convenience were very similar to what they experienced in the prior two quarters. As George mentioned, we continue to expect lower levels of inflation through the remainder of fiscal 2023, which is the assumption embedded in our outlook. As we've discussed on prior calls, decelerating inflation produces a short-term headwind from inventory holding gains. In the fiscal fourth quarter of 2023 and the fiscal first quarter of 2024, holding gain comparisons will be elevated. With that said, our track record of offsetting this impact over the prior two quarters gives us confidence in our ability to manage through it. Once we reach fiscal second quarter of 2024, the comparisons ease substantially. Total company third quarter adjusted EBITDA margins increased 47 basis points compared to the prior year period. We remain very pleased with our ongoing margin improvement, demonstrating our organization's commitment to strong profit results despite challenges related to lower levels of inflation. Diluted earnings per share was 51 cents in the third quarter and adjusted diluted earnings per share was 83 cents. As you saw in our earnings release, we have tightened our full year 2023 revenue outlook and raised and tightened our full year adjusted EBITDA range. For the full year, we now anticipate net sales in the range of $57 to $57.5 billion. This range incorporates our strong case growth momentum somewhat offset by lower levels of year-over-year inflation. Adjusted EBITDA now is anticipated to be in the range of $1.34 to $1.36 billion, an increase from our prior $1.27 to $1.35 billion range. This 2023 expectation keeps us on track to achieve our three-year fiscal 2025 targets we set at our June investor day. To wrap up, we are very encouraged by our third quarter results. which saw continued progress on our three focus areas, sustained profitable sales growth, adjusted EBITDA margin expansion, and lower leverage, despite challenges in the external environment. We generated significant operating and free cash flow, which allowed us to pay down debt and move to the midpoint of our leverage target range. Our organization is executing our strategy, and we believe 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.

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 and 2. Once again, that is star and 1 if you would like to ask a question. And we will take our first question from John Heimbockel with Guggenheim Securities. Your line is now open.