Performance Food Group Company

Thank you and good morning. We're here with George Holm, PFG CEO, and Patrick Hatcher, PFG CFO. We issued a press release this morning regarding our 2023 fiscal fourth quarter and full year results, which can be found in the investor relations section of our website at pfgc.com. During our call today, unless otherwise stated, we are comparing results to the results in the same period in fiscal 2022. The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found in the back of the earnings release. As a reminder, in the fiscal first quarter of 2023, we updated our segment reporting metrics to adjusted EBITDA from the prior EBITDA metric. Accordingly, the segment results for the fourth fiscal quarter of 2022 have been restated to reflect this change. Our remarks on this call and 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. PFG had an outstanding fiscal 2023, and we are proud with what we were able to accomplish. More importantly, we are just as excited about the upcoming fiscal year, which we believe will include additional growth opportunities and continued financial success for our company. As you can see from our press release this morning, we are growing our highest margin businesses, continuing to pick up market share in independent restaurants and building upon our strengths and convenience in Vistar. Our disciplined cost controls and focus on our financial position have enabled us to continue to invest behind growth opportunities while returning cash to stockholders. As you saw, we began to repurchase shares during the fiscal fourth quarter. Patrick will have more details to share about this program, but I wanted to highlight our buyback activity as a vote of confidence in our long-term business prospects. We plan to continue to reward our shareholders as we have financial success, and we are excited about the company's future. We are just over a year removed from our investor day when we laid out our vision for the future and set three-year financial targets. We are just as confident today as we were then. In fact, the 2023 fiscal year progressed even more favorably than we had originally anticipated. At this time last year, we discussed our 2023 outlook, which included a net sales range of $56 to $58 billion and adjusted EBITDA between $1.15 billion and $1.25 billion. I'm pleased to report that our net sales result came in above the midpoint of that original range and adjusted EBITDA was $163 million above the midpoint of the target we set last year. I am proud of our organization's ability to accomplish these milestones and navigate what, at times, was a difficult operating environment. This morning, we also reiterated our previously announced long-term targets. We remain confident in these projections, particularly after such a strong fiscal 2023. As you saw in our earnings release, the top end of our fiscal 2024 adjusted EBITDA guidance is already at the low end of our fiscal 2025 target. Let's discuss the key components that are driving these strong results. Our food service business is on excellent footing. We finished fiscal 2023 with fourth quarter independent case growth of 7.6 and a 6.2% increase for the full fiscal year. This is an outstanding result, especially given more difficult comparisons from the prior fiscal year period. Importantly, our independent case growth continued to accelerate at the start of fiscal 2024, coming in at about 9% in the first few weeks of the quarter. The investment in our sales force is paying off. So far, during the first quarter of fiscal 2024, we have seen consistent increases in independent cases per salesperson. We believe there is a long tail for our growth in independent restaurants, particularly as new members of our sales team continue to hit their stride. Within independent restaurants, performance brands were approximately 52% of total sales, again, showing the strength in our organization and our lead products. On the chain side of our business, some underlying weakness remains in foot traffic and the resulting case volume performance. However, due to our strong independent case growth, total food service cases were up year over year. In the quarter, food service experienced mild deflation of approximately 1.2%, a bit below where we had expected. While this did impact the top-line performance, the group food service adjusted EBITDA to $273 million, an all-time high for that segment. While we expect inflation to normalize as fiscal 2024 progresses, the structure of our business, including our fee-based contracts and pricing mechanics in the field, should allow us to continue to successfully grow profit, even in a low inflation or deflationary environment. Underpinning our strong food service results are positive trends in several important metrics. In the independent restaurant channel, cases per drop increased compared to prior year. As a result, we are seeing improvements in customer cases per week as our penetration improves and overall volume growth accelerates. As we highlighted last quarter, we continue to add new independent accounts at a rate similar to our total independent case growth, keeping our pipeline of new business strong for future periods. This is resulting in share gains for the independent channel. We are leveraging these top-line trends through continued focus on operating expense control, particularly in labor. Combined personnel expense per case for delivery and warehouse workers who are down year over year driven by improvements in lower contract labor costs and stable overtime expense. We are simultaneously investing in our sales force, which is driving our strong independent case growth. All these factors combined produced a strong finish to fiscal 2023, particularly in the independent restaurant space. We're excited for what fiscal 2024 has in store for our food service operations. Bistar had another outstanding quarter, finishing off a very strong fiscal 2023. Despite challenging inventory gain comparisons, Bistar adjusted EBITDA increased 31.5% in the fiscal fourth quarter. Solid 18% top-line sales growth was the result of case volume increases and the continued benefit from higher rates of inflation. Year-over-year case increases were a result of strength in value, theater, and office services. We're excited about the performance of Vistar, particularly given the strong pipeline of new business opportunities. Inflation at Vistar remains elevated and was roughly 13% in the fourth quarter, which was a slight decline from the mid-teen inflation rate in the prior three quarters. We anticipate a deceleration in inflation at Vistar, especially as we begin to lap price increases from the prior fiscal year period. Lower delivery and warehouse cost per case boosted bottom line results, helped by lower fuel prices and freight cost favorability. Pistar had a stellar fiscal 2023, and we're excited for its prospects in the coming fiscal year. Our convenience business performed well in the fiscal fourth quarter, despite significant inventory holding gain headwinds. As we have discussed on past earnings calls, the convenience segment will continue to experience one more quarter of higher than typical inventory holding gains. However, we feel confident in the underlying momentum of our convenience business and its long-term prospects. Let's take a moment to discuss convenience in more detail. After a successful entry with EB Brown in 2019, we then acquired Cormark in 2021. becoming one of the largest providers to the convenience store industry. Today, we operate under one brand, Cormark, with a unified structure and vision to grow our share and leverage our food service and manufacturing capabilities. The channel provides a significant opportunity for PFG with a total addressable market of approximately $195 billion across 150,000 outlets most located within one to two miles of their customer base. This proximity has led convenience retailers to expand their store footprints and product mix, lessening their reliance on fuel and tobacco. We believe these trends play to our strengths at PFG as we work to combine our convenience expertise with vast food service resources to bring something exciting to the channel. Our efforts are paying off as we find ourselves engaged in food service discussions with over 30 small to mid-sized chain operators, along with countless independents representing thousands of retail store locations across the U.S. and Canada. Beyond our efforts at Coremark, we are also growing the channel through performance food service, supporting advanced food concepts across convenience. The channel is evolving, and food service is at the heart of that innovation. PFG is here to capture that growth opportunity. Our progress has been impressive and we believe this is just the beginning. In closing, PFG had an outstanding fiscal 2023 and enters 2024 with momentum across our business units. We believe we are well positioned to continue our success in the market, particularly in the areas of our business that generate high profit and returns. Our exposure to a wide range of products, channels, and customer types provides resiliency various economic scenarios. As presented in our guidance and long-term outlook, we are confident in our ability to produce strong results for the foreseeable future. I'll now turn the call over to Patrick, who will provide additional detail on our financial performance and outlook. Patrick?

Thank you, George, and good morning, everyone. This morning, I will start with the review of PFG's financial position and capital allocation priorities. and provide some additional detail on the operating environment. I'll then review our fiscal fourth quarter 2023 results and finish with a summary of our outlook for fiscal 2024 and beyond. PFG finished fiscal 2023 in a strong position, posting solid case growth and record net revenue, despite slowing inflation through the quarter. This resulted in double-digit gross profit improvement year over year and adjusted EBITDA above the upper end of our previously announced guidance range for fiscal 2023. Our business model is showing its resiliency with strong results across the three segments with particular areas of strength in each. We believe that this structure and our exposure to unique channels through VISTAR and convenience provide an advantage over our competition. In particular, the high volume of consumer packaged goods products sold by Vistar and Convenience provide insulation from the impact caused by some of our more volatile inflationary dynamics in the food service space. Still, our food service organization did a fantastic job executing through the fiscal year, including the fourth quarter, when inflation swung negative. We do not expect a long cycle of deflationary pressure in food service and have seen signs of stabilization in some categories, particularly in protein like beef and cheese. With that said, we believe our food service business can succeed in a range of scenarios as seen in the fiscal fourth quarter. This is demonstrated by our outlook for fiscal 2024 and beyond, which I will discuss in more detail shortly. Let's start by discussing a few specifics on our leverage, cash flow, and capital allocation priorities. Last year at our investor day, we announced our three key strategic priorities, consistent profitable top line growth, adjusted EBITDA profit margin expansion, and leverage reduction. We have made significant progress in all three areas, but I would like to focus on the third item, leverage reduction. As you know, we have a stated leverage target of 2.5 to 3.5 times net debt to adjusted EBITDA. By the end of the fiscal third quarter, we had achieved the midpoint of that range. And this quarter, we made further progress, finishing the fiscal year at 2.9 times net debt to adjusted EBITDA. I am proud of our organization's disciplined approach to our balance sheet and believe we are now at a very comfortable level of leverage. What does this mean for PFG? First, we will continue to focus on our leverage to maintain a healthy balance sheet position going forward. With that said, our current financial position has provided additional flexibility in our capital allocation priorities. As you saw in this morning's press release, we began repurchasing shares during the fiscal fourth quarter as part of the previously announced $300 million share repurchase plan authorized by our board last November. We anticipate making future strategic share repurchases pursuant to this plan subject to marketplace conditions. Additionally, we will continue to invest behind the business through growth capital expenditures and investments in technology. We have a history of executing value-creating M&A and intend to continue to be active in this area if the right deal at the right price presents itself. We believe that these areas will continue to drive long-term value for our stockholders. All of this is possible because of the strong cash flow our business generates. Through the 12 months of fiscal 2023, PFG generated 832 million of operating cash flow. After accounting for approximately 270 million of capital expenditures, PFG generated 562 million of free cash flow over the past 12 months. With that, let's quickly review some highlights from our fiscal fourth quarter. PFT, total company net sales increased 1.9% in the fourth quarter to 14.9 billion. Our net sales performance was driven by approximately 2% organic case growth, including strong 7.6% independent restaurant case growth and improvement in VISTA channels, offset by lower levels of year-over-year inflation. Total PFG gross profit increased 12% compared to the prior year's quarter. Gross profit per case was up 62 cents in the fourth quarter compared to the prior year's period. In the fourth quarter, PFG reported net income of $150.1 million, and adjusted EBITDA increased about 8% to $385 million. Total company inflation continued to moderate due to deflation in the food service segment. Total company cost inflation was 4.6% in the quarter. The deceleration was driven by our food service segment, which experienced 1.2% deflation in the fiscal fourth quarter. Bistar inflation slowed a bit during the fourth quarter, but remained elevated relative to historical rates, increasing at a low teen level. Inflation in the convenience segment also dipped slightly, moving below 10% for the first time since the fourth quarter of last year. We continue to expect lower levels of inflation during fiscal 2024, which is the assumption embedded in our outlook. We believe that decelerating rate of inflation is manageable, as shown by our improvement in gross profit per case in the most recent quarter. Diluted earnings per share was 96 cents in the fourth quarter, and adjusted diluted earnings per share was $1.14. As you saw in our earnings release, we announced guidance for the full year fiscal 2024 and the first fiscal quarter. As you are aware, we will have one more quarter of higher than normal inventory holding gain comparisons, which will then normalize when we reach the fiscal 2024 second quarter. We anticipate net sales between $14.7 and $15 billion and adjusted EBITDA in the $360 to $380 million range during the first fiscal quarter of 2024, despite the inventory holding gain comparison. Let's review our specific targets for the full fiscal year 2024. For the full year, we anticipate net sales in the range of $59 to $60 billion. Adjusted EBITDA is expected to be in the range of $1.45 billion to $1.5 billion. We have also reiterated our long-term outlook, which includes net sales in the range of $62 to $64 billion and adjusted EBITDA between $1.5 and $1.7 billion in fiscal 2025. As George mentioned, our strong 2023 results coupled with underlying business momentum for fiscal 2024 suggest that the lower end of our long-term adjusted EBITDA range is possible a fiscal year early, as indicated by our 2024 outlook. To summarize, we are very pleased with how we finished fiscal 2023 and have high expectations for the upcoming fiscal year. We continue to make progress on our three focus areas, sustained profitable sales growth, adjusted EBITDA margin expansion, and lower leverage. The strength of our business results, solid cash flow generation, and healthy balance sheet has enabled us to begin repurchasing shares, another value creating use of cash for our shareholders. Our organization is executing our strategy, and we believe we are well positioned to continue our success and create value for our stockholders 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.