Performance Food Group Company

Your program is about to begin. Good day and welcome to PFG's fiscal year Q2 2025 earnings conference call. If you would like to ask a question at the conclusion of the prepared remarks, please press the star key followed by number one on your telephone keypad at any time. I would now like to turn the call over to Bill Marshall, Vice President, Investor Relations for PFG. Please go ahead, sir.

Thank you and good morning. We're here with George Holm, PFG CEO, Patrick Hatcher, PFG CFO, and Scott McPherson, PFG COO. We issued a press release this morning regarding our 2025 fiscal second quarter 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 2024. 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. 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. Our company remained active during the fiscal second quarter, continuing to build upon our underlying business momentum while adding new avenues for growth through targeted acquisitions. I am very pleased with the results and believe we are well positioned to accelerate our growth through the back half of the fiscal year. This morning, I will review some of the high-level trends in our business and industry, and touch upon our early accomplishments integrating both Jose Santiago and Cheney Brothers. I will then turn the call over to Scott, who will review details of our segment results for the quarter. Finally, Patrick will review our financial position, key priorities, and guidance for the balance of fiscal 2025. Let's begin with an overview of our second quarter results and the industry factors influencing performance. We are pleased to see an acceleration in our underlying organic growth in the fiscal second quarter through a combination of steady market share gains and an improving consumer backdrop. In particular, our organic independent restaurant case volume grew 5% in the quarter, stepping up from the 4.3% we reported in the fiscal first quarter. Keep in mind, this result includes a difficult year-over-year comparison in December, primarily due to calendar differences compared to the prior year. In October and November combined, our organic independent restaurant case volume was up over 7%. As we moved through January, our case volume reaccelerated, in part due to easier comparisons, but also reflecting the strength of our underlying business. I continue to believe we can achieve fiscal year 25 6% independent case growth with some help from the macro. My confidence is underpinned by several factors, including the excellent work of our food service teams. We continue to build our organization through targeted hiring of talented salespeople and have increased the pace of Salesforce hiring. Turning to our Vistar segment, business picked up modestly in the fiscal second quarter following a challenging start to the year. Total cases grew 1.4% per Vistar in the fiscal second quarter with broad growth across many channels. In particular, the vending, office coffee services, and corrections channels saw positive case and sales growth in the quarter. Theater box office revenue was strong in the final months of the calendar year, reflecting high demand content. This by itself is encouraging for the long-term health of the movie theater channel. As we discussed last quarter, we anticipate a better back half of the fiscal year for Vistar due to improving consumer sentiment and easier year-over-year comparisons. Similarly, our convenience business is building momentum on both the top and bottom lines. As we have discussed on prior earnings calls, the convenience industry has been challenged, largely due to significant inflationary pressure in candy and snacks. However, we remained encouraged by Cormark's ability to win market share and outpace key categories compared to industry peers. Food service into convenience remains a large driver of our performance, but candy and other key non-nicotine categories have also boosted volume performance through low single-digit growth. As our legacy business continues to perform well, our integration team has been hard at work welcoming the teams from both Jose Santiago and Chaney Brothers. Early in the fiscal second quarter, we closed on the Chaney Brothers acquisition, have included their results in our numbers beginning on the closing date. As we discussed when we announced the deal, we have high expectations for Chaney, and I have admired their success for many years. I am pleased to say that they have made substantial progress in the months since becoming part of PFG, and early results have been very strong. The past few months have not been without challenges, particularly in the southeast markets that have been impacted by weather, including hurricanes, and a slow recovery from the consumer. However, the Cheney Brothers team is proving to be formidable at managing through these challenges and continues to grow at a brisk pace. Jose Santiago has performed well. This organization joined PFG early in the fiscal year, and we remain pleased with the results. We believe Puerto Rico will be an increasingly important market, and Jose Santiago's strong market position provides an excellent platform for growth. We are excited to see what the future holds. Keep in mind that both Cheney Brothers and Jose Santiago have slightly different seasonal patterns than legacy PFG, with strong winter selling seasons. As a result, we expect nice contribution to our top and bottom lines, particularly in our fiscal third quarter. Taken together, PFG had an excellent fiscal second quarter with contribution from all three of our business segments. Our diversification strategy across the food away from home market continues to pay dividends and provide significant areas of growth opportunity for the long term, which we believe is unique to PFG. I'd now like to turn the call over to Scott McPherson, In December, we announced Scott's promotion to Chief Operating Officer effective at the beginning of the calendar year. We were thrilled to welcome Scott to our team through the COREmark acquisition, and we greatly value the high-level management expertise he has brought to PFT. In addition to running COREmark, in 2023, Scott assumed oversight of the VISTAR segment, and in 2024, was named our Chief Field Operations Officer giving him responsibility for all three business segments. In the role of COO, Scott will continue to oversee our business segments and strengthen his influence across our organization and industry. I've asked Scott to join our earnings calls to provide additional insight into our business operations. He will also be available to take your questions during the Q&A portion of our call. Scott assumed the Chief Operating Officer role from Craig Hoskins. I cannot speak highly enough about the contributions Craig has made to our organization. Craig was the VP Sales of Multi Foods Distribution Group in 2002, which was our first acquisition, which later became Vistar. He also served as the CEO of our Performance Customized Division and then also CEO of our Performance Food Service Division before ascending to three years as the President and Chief Operating aiding officer of PFG. Craig did an excellent job onboarding Scott into his new role. I'm thrilled to have Craig as our chief development officer. As we announced in December, in this role, Craig will work closely with Jose Santiago and Chaney Brothers as we integrate those organizations into PFG. I'll now turn the call over to Scott McPherson.

Thank you, George, and good morning, everyone. I'm excited to join today's call and share some insights into our performance, the broader market, and some of the initiatives that will help PFG maintain our long track record of growth and operational execution. Before I jump in, I want to reflect on my journey to this role over the past three years. Coming to a company through acquisition is not always the easiest transition, but it quickly became evident why PFG excels in this space. We target well-run companies and leverage that talent and knowledge they possess for the betterment of the broader organization. This approach has created a culture that embraces growth, welcomes change, and inspires people to go the extra mile. During the past year, I've had the opportunity to interact with PFG associates across our entire business platform. I've seen firsthand the dedication that our associates bring to work every day. which is instrumental in our ability to exceed the high expectations we set for ourselves. I want to highlight a few examples of the talented and dedicated associates that make PFG different. In our VISTA segment, Jose Luis Arias started as a sanitation specialist with our organization over 50 years ago, advancing to become a CDL driver, and this year will eclipse the 3 million mile mark accident free. Our Cormark SVP of HR, Allie Marciano, was named a top woman in convenience, one of the industry's top honors, and at PFS, Jasmine Dan was the recipient of the 2025 Women's Food Service Forum Changemaker Award. It's individuals like Jose, Allie, and Jasmine that inspire our 40,000 associates to come to work every day with a passion to succeed. Now let's take a deeper look into our three operating segments, starting with our food service business. Food Service had an outstanding second quarter driven by case volume growth across our independent and chain accounts, solid margin improvement, and expense control. Both Chaney Brothers and Jose Santiago contributed nicely to these results, producing double-digit top and bottom line performance for the segment. Stripping out the benefit of these two acquisitions, our underlying business momentum was strong. Organic independent case growth of 5%, and low single-digit case increases in our chain business produced approximately 3% total organic case growth for food service in the quarter. We are pleased to see our chain business adding top-line growth and anticipate even better performance in the second half of the year due to new business wins and signs of stabilization from some of the more challenged accounts. We also continue to pick up new independent accounts. Our 5% organic independent case growth was driven by a 5% growth rate in new accounts, as penetration across the full quarter was flat. With that said, excluding the difficult December calendar comparison, penetration was up in independent and total food service in October and November. While we're certainly not back to normalized levels of restaurant performance, we are seeing early signs of stabilization. Within our independent business, PFG's company-owned brands continue to be a significant growth driver. These brands account for nearly 53% of total sales in the independent channel. As we've discussed in the past, brands' growth is a key strategy as they provide high quality and great value to our customers, enhance our margins, and increase customer retention. Expansion of our brand portfolio will continue to be a key strategic initiative going forward. Also key to our growth is continuing to attract talented sales associates, which help drive our independent case growth. In the second quarter, our Salesforce headcount increased nearly 7% as we added over 200 new sales associates compared to the same period last year. From a profit perspective, positive makeshift due to faster independent growth along with more profitable chain business drove gross margin performance in the quarter. Our focus on operating metrics, including reducing shrink and workforce efficiency, produce leverage to our gross profit performance, leading us to a 29.4% growth in adjusted EBITDA for the quarter. In our convenience segment, the underlying industry fundamentals remain challenged as anticipated. However, a combination of new account growth and market share gains resulted in a positive total volume in the period, outpacing the industry in key product categories. The declines in cigarette carton sales were a drag to top line performance, though these declines have had minimal impact on our bottom line results. Our convenience team continues to roll out new food service offerings for customers, which is becoming a key part of our growth story. In the fiscal second quarter, food service cases in the convenience increased at a mid single digit pace, with sales growing at a high single digit clip. Importantly, this growth is coming from some of our largest accounts. including double-digit sales growth in three of the top five accounts we service. The number of turnkey convenience food service programs sold has grown steadily since the beginning of fiscal 2024. We are proud of the progress our Comarch team has made and believe there is much more to come down the road. These efforts produced another double-digit performance for the convenience segment with adjusted EBITDA of 28.5% in the second quarter on a purely organic basis. At our investor day in late May, we will cover the progress Cormark has made since being acquired, which will highlight strong profit growth. Finally, Vistar made progress in the second quarter despite some difficult industry dynamics. Case growth from some of Vistar's largest channels, including office coffee services, theater, and corrections, produced low single-digit case increases for the segment. Vistar's largest channel, vending, also saw case increases year over year. The legacy vending machine business declines continue to be offset by growth in micro markets, which we included in our vending channel reporting. We are optimistic about the micro market channel, which is not only a growth area for the industry, but allows for a wider product assortment and ultimately higher profit realization for BizStar. The theater business also had a strong quarter despite heightened competition in the market. We are pleased to see strong box office results with high quality content and believe it is a positive sign for the long-term health of the channel. With that said, we do expect some near-term volatility due to competitive pressures and a lighter box office slate in the fiscal third quarter. This is all included in our projections. Taken together, all three segments contributed a strong second quarter, and the outlook is bright. We are pleased with the standalone results at each segment, but are even more excited with the power we generate when our businesses join forces to serve our broad spectrum of accounts. I will now turn the call over to Patrick, who will review our financial performance and outlook. Patrick?

Thank you, Scott. I'm excited to share some of the financial details from our second quarter and first half of fiscal 2025. As George and Scott have detailed, our business is executing well, driving strong operational results. This translated into another quarter of robust financial performance. Both our sales and adjusted EBITDA came in above the upper end of our guidance ranges we laid out three months ago. Furthermore, we continue to use our cash flow and balance sheet to drive long-term shareholder value. Let's review some highlights from our fiscal second quarter. PFG's total net sales grew 9.4% in the quarter. Our result was aided by the addition of both Jose Santiago and Chaney Brothers. However, excluding the acquisition benefits, all three of our segments produced positive organic case growth in the quarter. In particular, total independent restaurant cases were up 19.8% in the period. Excluding the acquisition benefit, organic independent cases were up 5% for the quarter. We are pleased with our organic independent case growth result which was an acceleration from the prior two quarters despite a very difficult December comparison due to calendar differences. As George described, combining October and November, our organic independent case growth was more than 7%. Early in the fiscal third quarter, we saw faster underlying case growth in our independent restaurant business. We remain optimistic with respect to our growth. though we would note that January was impacted by a number of factors, including an easy comparison due to tough weather last year, somewhat offset by a choppy start to calendar 2025 due to unusual weather across various regions of the United States. Looking past the January noise, which is typically the smallest volume month of the year, we are optimistic for the balance of fiscal 2025. Total company cost inflation was about 4.6% for the second quarter, slightly lower than the 5% we reported in the first quarter. Food service cost inflation was 3.2% in the quarter, moving down sequentially and roughly in line with our expectation for long-term inflation rates. We would note elevated year-over-year inflationary prices in poultry, cheese, and beef, three of our largest categories in food service. Cost inflation for Vistar was roughly 2% in the quarter, while convenience experienced cost inflation of 6.7%. Keep in mind that convenience inflation is typically boosted by cigarettes and other nicotine pricing, which is typically in the mid to high single-digit range. Sequential inflation produced a modest year-over-year inventory hold and gain benefit in the second quarter, though within the normal range of hold and gain variances. Given our current projections, we are modeling very little year-over-year holding gain impact over the back half of the fiscal year. Public company gross profit increased 14.4% in the fiscal second quarter, representing a gross profit per case increase of 29 cents in the quarter as compared to the prior year's period. We've continued to see excellent cost control producing another quarter of double-digit profit performance from our food service and convenience segments. Both food service and convenience produced 29.4% and 28.5% adjusted EBITDA growth in the quarter respectfully. Vistar's adjusted EBITDA growth turned positive year over year, though the segment continues to be impacted by lower foot traffic and customer specific challenges in some channels. We continue to anticipate Vistar's results will improve in the back half of the fiscal year. In the second quarter of fiscal 2025, PFG reported net income of $42.4 million. Adjusted EBITDA increased 22.5% to $423 million, above the high end of the guidance we announced last quarter. Diluted earnings per share in the fiscal second quarter was 27 cents, while adjusted diluted earnings per share was 98 cents, an 8.9% improvement year over year. Our effective tax rate was 25.2% in the fiscal second quarter. We anticipate a higher tax rate in the back half of the fiscal year, closer to our historical range. Turning to our financial position and cash flow performance. In the first six months of fiscal 2025, PFG generated $379 million of operating cash flow. After adjusting for $204 million of capital expenditures, PFG delivered free cash flow of about $175 million. We have selectively invested in inventory of candy and tobacco through the first half of the year in anticipation of potential price increases in those categories. Still, the team did an excellent job managing working capital to drive the strong cash flow performance in the period. Our capital spending levels remained fairly steady over the first two quarters of the fiscal year. with a run rate of approximately $100 million per quarter. In our legacy business, we expect to maintain a similar level of spending over the next several quarters to maintain our growth investments in facilities, fleet, and other technology. We will then layer in some additional capital expense to support growth projects at both Chaney Brothers and Jose Santiago. These capital projects are important to the long-term growth of our company and typically generate a high rate of return. During the fiscal second quarter, we drew down our ABL facility by approximately $2 billion to fund the Cheney Brother acquisition, which closed in early October. As we discussed last quarter, this pushes our net leverage above the top end of our 2.5 times to 3.5 times target range. We feel very comfortable with our current leverage and the available liquidity of our ABL facility. Still, as we highlighted in November, we expect to prioritize debt reduction in the short term to move our leverage back within our target range over the next several quarters. We believe this is the best use of capital at this time and will position us to look at additional M&A and share repurchases opportunistically in the future. In fact, our M&A pipeline is very robust. PFG has a history of successful acquisitions to drive growth, and we expect that to continue. At the same time, we will apply our typical high standards and robust due diligence to target high quality acquisition opportunities. Opportunistic share repurchases also remain an important component of our capital allocation strategy. As we prioritize debt reduction and look out for value creating M&A, we will likely repurchase fewer shares in the near term. However, all of our capital allocation decisions are based on marketplace conditions and we envision a return to higher levels of share buybacks in the future. Turning to our guidance for fiscal 2025, for the full fiscal year, we now expect net sales to be within a $63 to $64 billion range, which is a $500 million increase on both ends from the $62.5 to $63.5 billion range we discussed last quarter. Our net sales have been trending favorably, and we anticipate this to continue in the back half of the fiscal year. We also see upside to our profit forecast. We now anticipate full year 2025 adjusted EBITDA to be in the range of $1.725 billion to $1.8 billion, an increase to the bottom end of our previously disclosed target. Our increased outlook to both sales and adjusted EBITDA is based on strong underlying fundamentals of our three business segments, a modestly improved consumer outlook, and strong early results from both Chaney Brothers and Jose Santiago. For the third quarter of 2025, we anticipate net sales to be in a $15.2 to $15.6 billion range, with adjusted EBITDA in a $390 to $410 million range. As you can see from our third quarter projections, the addition of both Chaney Brothers and Jose Santiago helps smooth out some seasonal volatility our business has historically experienced. As George mentioned earlier, both Chaney Brothers and Jose Santiago typically experience stronger winter months due to their geographies. To summarize, PFG built upon a strong start to fiscal 2025 with better than anticipated second quarter growth on both the top and bottom lines. Our financial position is strong, and we are generating substantial cash flow, which we are investing behind growth initiatives and debt reduction. We also believe both additional M&A and share repurchase activity will play important roles in creating long-term shareholder value. The integrations of both Chaney Brothers and Jose Santiago are going well, and we are on pace to achieve the financial targets we set out for these deals. We are optimistic for the back half of the fiscal year, allowing us to increase our full-year guidance. Our diverse business model, spanning a wide range of food-away-from-home channels, provides growth opportunities that our teams are actively pursuing, and we are hiring talented salespeople to capture this growth. Thank you for your time today. We appreciate your interest in performance food group and with that George Scott and I would be happy to take your questions.

And at this time, if you would like to ask a question, please press star one on your telephone keypad. You may withdraw your question at any time by pressing star two. Once again, that is star one and we will take our first question from Kelly venue with BMO Capital. Please go ahead.

Good morning, thanks for taking our questions. Just was curious if you could comment a little bit more in depth about which segments are contributing to the higher sales outlook. Is that kind of broad based across the three segments or the M&A? And maybe you can fold into that. Just more specifics and on the comments that you made about signs of stabilization for the consumer and some signs of stabilization in some of the challenged accounts. I think that was in regard to food service, but any elaboration there?

Morning, Kelly. This is Scott. Yeah, on the second sales piece, obviously really happy with how our trends look on independent growth. You know, we're up in AM headcount about 7%. We're up in new accounts about 5%. And the other thing that we feel really good about is our lines per order on our existing accounts continue to go up. So, you know, we feel like if the macro, you know, swings back a little bit, we're in a really good position. The other thing I'd say that was optimistic in the food space was our chain accounts, our national chains were up as well. which is a little bit of a rebound from what we've seen in the past. On the convenience side, I would say, you know, we just continue to take share and outperform the macro and convenience, and we expect that to continue, and we feel like, really, in both of those, we have a really solid pipe as well as we finish out the back half of the year. Anything else? Oh, yeah, go ahead.

Yeah, I would say that... We're going to see some continued challenges in VISTAR the rest of this fiscal year, although we're up against some easier comparisons. So, we see several of the channels that will show some good growth, but that will be kind of our laggard from a sales growth standpoint, the rest of this fiscal.

Okay, that makes sense. There was a comment about cost of goods optimization and procurement efficiencies. Can you just elaborate on that? It doesn't seem like that has been a focus of the organization as much in the past. Maybe I'm wrong, but can you just tell us about the work you're doing on cost of goods optimization and also which segments that should impact?

So, Kelly, this is Scott. Yes, I would say it's been something that has always been maybe something we haven't talked about as much, but always something's been in play. I would say that we've worked a lot harder in collaborating across the segments over the past 12 to 18 months, which has helped us gain some traction, both in driving sales growth, but also in cost of goods optimization. So, definitely something we're focused on, we'll continue to focus on, and just part of our strategy around growing margins.

All right. Thank you.

Thank you. We will take our next question from Edward Kelly with Wells Fargo. Please go ahead.

Hi. Morning, everybody. I wanted to start on the food service business and just, you know, your thoughts on sort of like underlying momentum of the business. You grew EBITDA obviously very well this quarter. I was curious if you could help us with the underlying EBITDA growth of the business. I think if you take out the deals, kind of thinking like maybe mid single digit, you know, EBITDA grows on about 3% organic case growth. Just curious if that's right and how you think about, you know, that performance. And then looking forward, you know, to get the 6% independent organic growth for the year, you probably need to do 7 to 8 in the back half. Just, you know, color on your confidence, you know, in that outlook.

Yeah, you're correct. It's going to take a, you know, 7% to 8% increase, the back half. And at least our internal measurements, how we look at the marketplace and what information we get from outside of our company, it appears there was probably a 2% maybe reduction in traffic, which is probably about where independent was. So if that got just back to normal, we would be running you know, in that 7 to 8% increase in cases. We do expect that to get better. Have not seen that yet. We thought we would have easier comparisons in January and our January growth looks pretty similar to Q2 and we thought it would be better, but we had bad weather both years. So just the fact that this year we to do a little better job of overcoming that bad weather, I think bodes well for us also. But I would say for us to get to that 6% for the year, we're probably going to need some help from the industry and see a little better macro backdrop than what we see today. But we just see signs that that's coming. Also, the other thing that gives us a lot of confidence is that we're growing our SKUs or our line items at a much faster rate than we're growing our cases. So we're penetrating better within the customer. They're just not buying as much of the product as they were a year ago. So that gives us some confidence too, should the industry get a little bit more vibrant. And then as far as underlying, I would call our EBITDA, you know, we were very close to double digit, but not quite. without Jose Santiago and without Cheney. And by the way, as was mentioned by Patrick, those two are performing well, and I would say that Cheney is really performing exceptional.

Great, thanks. And then just a quick follow-up. I wanted to ask you about inventory holding gains. Just curious if you could provide any color on the second quarter and year over year, you know, change there. Was that a material benefit at all? And then in terms of the guidance, you said that, I think this is what you said, that there's not, you're not anticipating, you know, material holding gains in the back yet. But then I think after you said you invested in candy and tobacco inventory ahead of price increases. Is that opportunity, I guess, versus guidance if those price increases happen?

Yeah, thanks, Ed. This is Patrick. I'll address those questions. So in the second quarter, we did see some benefit of inventory holding gains, as we mentioned. But I do want to stress all of these gains are manageable. There's nothing outsized about them. We did invest in inventory, but for the back half of the year, we do not expect between Q3 and Q4 to really experience any substantial holding gains. And for the full year, the total holding gains we expect to be very minimal. So, there's a little, you know, quarter-to-quarter differences, but other than that, it's really manageable and relatively immaterial. Okay. Thanks, guys. Thank you.

Thank you. We'll take our next question from John Heinbockel with Guggenheim. Please go ahead.

A couple of things on the independent case growth. The penetration in lines, is that more center of the plate, non-fresh, or are you eating into specialty competitor market share? I'm curious because that seemed like a big opportunity. When you think about, let's say if you can pick up another 200 or 300 basis points in case growth, do you think that's more you know, you break it down, is it more new accounts, lines, or actually cases per line? Where do you think that comes from? Where are you most optimistic?

Well, we're still fairly reliant on new customers. We're running about 5% more as far as new customers go. Lines, we're doing a couple points better than we're doing in case growth. So I would say that Part of the upside for us would be if they start buying more cases of what they're already using and that, of course, is going to mean that the. The market has to get a little stronger. I think we'll continue to to do well from a line standpoint, and we'll continue to do well. With new accounts, I'm also going to have Scott make a couple of comments there.

No, I agree, George. I think, you know, I look at the new accounts as right now being primarily the driver of our growth. You know, I think we've done really, really well with same-store penetration, and as we see the macro pick up, we feel like that's positioned us extremely well.

And then maybe for you, Scott, right, since you know the convenience store business so well, I'm curious, you look out over the next, I know the contracts, right, are are lengthy. But you look out over the next, I don't know, three to five years, maybe talk to the opportunity to win a lot of these RFPs, because it would just seem like your product lineup lines up really well with what most C-stores want. So I would think there's an opportunity to meaningfully move the dial on top line as those RFPs come up.

No, I think you make some great points, John, and we've worked really hard to combine our strength in food service and convenience to create an offer that's really compelling to our national chain customers, but also to the independents as well. So to your point on top line drivers, most of our contracts are three years. Some of them are five years. We feel like we have a really strong pipeline. We worked really hard jointly across our segments to create a compelling offer, and we feel like we're going to win our fair share as those come available.

John, I should also mention that we're doing well within Coremark in the food service business, but we're actually growing even faster in performance food service where that operator is using a broader assortment of items than we can handle, particularly in the freezer and cooler out of Cormark. So those products are being delivered on performance food service trucks and show up in our performance food service sales. Thank you, guys.

Thank you. We'll take a next question from Mark Hardin with UBS. Please go ahead.

Hey, good morning. Thanks so much for taking the questions. So to start, How are you thinking about the inflation outlook at this point over the next few quarters in food service? We've seen egg prices really take off recently, for example. And then how do you think about the potential impact if tariffs ultimately go into effect on Mexico or Canada?

Yeah, Mark, this is Patrick. On inflation, we're really thinking what we saw in Q2 is what we're expecting to experience by segment going forward and for the latter half of the year. So, again, just very similar for food service to be in those low to mid single digits. This are in the low single digits and convenience more in those mid single digits. And that's really what we're projecting for the back half of the year. And that's for us. That's a really good place to be. We can manage this inflation and we think it's good for the industry now on the question of tariffs. You know, there's a lot of discussion obviously going on around this. We certainly can't predict what's going to happen, which countries, which products, those type of things. But I think if you take a step back and think about this just holistically, we kind of view tariffs similar to inflation. It's going to potentially increase the cost of goods, but we're largely a pass-through organization. And so it's a little bit of a simplistic view, but right now that's how we're viewing it because we don't have any details on it. Just like inflation, we'll manage it. And that's pretty much how we're going to handle it.

Great. That's helpful. And then you guys talked about an acceleration in independent case volume in January. I understand it's a small month, but are you able to quantify, at least for January, the impact in the winter storms? And then just how did Cheney hold up, given its Southeastern footprint?

Yeah. January is not a very important month. month in the year, certainly the least important as far as how it impacts sales results. So I think for us, it's going to be more about February and March as far as the third quarter goes. Now, Cheney, obviously impacted by the hurricanes, recovered very quickly and still some impact on the West Coast, primarily of Florida, where we have many restaurants that are still closed down. But all in all, I mean, their sales growth has been great, and they just seem to work their way through this. They're very experienced dealing with hurricanes, and they did a great job.

Great. Thanks so much. Good luck, guys.

Thank you. We will take our next question from Alex Slagle with Jeffrey. Please go ahead.

All right. Thanks. Good morning. Had a follow-up sort of along the lines of what Mark was getting to and maybe the potential implications for the industry and PFG specifically related to maybe the potential immigration enforcement actions under the new administration. I mean, again, a lot of unknowns there, but just curious your initial views there.

Yeah. Hey, Alex. It's Patrick again. I think, you know, just it's obviously very important, you know, all of our employees are documented and, you know, we can't really speak to what's going to go on with the immigration as well. But, you know, we don't see an impact to our company, but there are obviously other impacts that we just can't predict at this moment. So, you know, that's where we are. Yeah.

that makes sense maybe just one tag onto that you know we're in a position right now where we've got you know kind of record low overtime and temp expense our workforce is in great shape safety performance is really strong and feel like we've kind of created a work culture where people want to be so we feel really good about being able to navigate in a tough environment thanks for that i also wanted to ask on your views on

new restaurant formation and the focus on new customer acquisitions? Are you seeing any signs of slowing or anything changes in certain regions as we move further past the closures from years ago and facing higher build costs and obviously still a tough traffic environment for the industry?

Yeah, there continues to be new restaurants obviously coming around. I think the effect of COVID is pretty much gone. I think that most of those restaurants have gone from dark to maybe not vibrant, but open. And there's been a considerable amount of closings of particularly casual dining chain restaurants. So I think those buildings are single purpose as well and will eventually be occupied by a restaurant. So I see continued increase in particularly the independent restaurants. And then there's some chains that are growing fast right now and are putting up units at a brisk pace. And, you know, we're selling some of those.

Thanks. Thank you. We'll take our next question from Jacob Aiken Phillips with Mellius Research. Please go ahead.

uh hi thanks for the question and uh congrats scott so i wanted to ask a little bit more about cheney last quarter uh you raised guidance like 100 million which seemed a little low when you prorate like the 160 million trailing 12 month numbers and i understand there was some volatility with the hurricanes so just curious if you're still thinking about contribution for changing the same as you were last quarter

Yeah, Jacob, this is Patrick. On the guidance, I mean, again, we felt really good about how we performed in the first half of the year. And as we mentioned, we took up, you know, the sales guidance by $500 million, both on the top and bottom end. And I would say that that was the area where we were maybe a little more conservative because we're looking at a lot of different factors and we've seen things improve, as we mentioned on the call with our earlier comments. And then on EBITDA, we brought up the bottom end by $25 million. So again, a beat and a raise. It's a very clean beat and raise. And we were probably feeling we had the EBITDA numbers a little tighter. But we feel really comfortable about the improvement in the guidance. And it's still a little early in the year in terms of we've got another six months there. As you mentioned, there's been some choppiness to January. There's a few other things. So we feel really good about our results. And we'll continue to adjust accordingly.

Yeah, I should add with Cheney that they're being very aggressive around hiring. And I think they're making some really wise investments in people, particularly in salespeople. And we want that to continue to happen. That said, obviously, we're going to be running higher expense ratios than they were running before because of that. But that said, they're still performing very, very well. on that EBITDA line, and we don't see anything that gives us any concern moving forward with Cheney.

Thanks. And then, could you talk about any warnings you have on the private label for Cheney? I know it's pretty under-penetrated compared to, like, the PFG legacy business. I think you said 15% last quarter, and you're maybe looking into what their products you want to keep and which PFG products you want to implement there.

Yeah, the number that we gave for our percentage of independent in our brand, that was an organic number without the two acquisitions. I would suspect that for a while, both of those acquisitions are going to be a lower percentage of our brand than what we typically had with any of our acquisitions. You know, there's good reasons for that. Part of it is Cheney's go to market strategy that they've had. And we certainly want to do well with our brands there, but we also don't want to disrupt how they go to market. They also have some brands of their own, and we're in the process of determining which of those we're going to consider to be our brands and move forward with those. Then when you get to Jose Santiago, Uh, it's a different structure in Puerto Rico. There's. Exclusivity that is, uh. Part it's it's a law where. You can have exclusive exclusivity on a national branded product. They're doing well with those items. And I envision us continuing to to market ourselves in Puerto Rico. The way Jose Santiago has always marketed themselves.

Thank you, and we will take our next question from Jeffrey Bernstein with Barclays. Please go ahead.

Great. Thank you very much. Two questions. The first one, just on the broader consumer outlook, I'm just keen to clarify your view. I think you mentioned October and November trends were encouraging, and you seem confident in improvement to come for the rest of the year. I think you mentioned that you're maybe not seeing it yet. So I'm just wondering what has you confident, whether there are some metrics that you view as leading indicators or otherwise. But if the consumer doesn't improve as you're anticipating, you know, your level of confidence in that guidance, because it does seem like you mentioned you need to see a little help from the consumer. And then I had one follow-up.

Yeah, I'm going to look backwards a little bit here before I answer the question going forward. If you look at October and November, it was very encouraging. But where December had difficult comparisons, November had very easy comparisons because Thanksgiving changed from year to year. And that's a low month. So October is probably more effective number to use to project forward. But it's also a ways back. uh january i think is a real hard month to use because last year was heavily affected by weather and so was this year but if we look at october's number which we think is more reflective of the marketplace and we put some improvement in there which we're expecting from the market i don't know that we have real clear reasons that we can give for that. It's just something that we feel today and that gives us encouragement for that second half of the year. And the other thing with it, too, is we've got more people coming off non-competes. We've continued to hire aggressively in this marketplace. And then on the national account area, we got some business going out, but we have much more coming in. in the rest of this fiscal year. So you just put those things together, we feel real good with it. Then when we look at the convenience part of the business, that's a very challenged segment today. We continue to do well. We've added several new accounts. We have several coming on board and some that are pretty sizable. So we feel real good about the growth there. Now, in that business, couple percentage points in growth when you consider what's happening in the tobacco world that's great growth and we can leverage a couple points in growth to very good earnings growth and we feel we're on a path to get to that couple points understood and then just following up on the M&A commentary clearly it's been a busy

year or so. And Scott, I think you mentioned the pipeline is very robust. But at the same time, I know you mentioned your leverage levels are elevated and you're looking to pay that down. So I'm wondering first if you could just share what that leverage level is. And does it temper the appetite for further M&A in the near term, especially with the big West Coast opportunity? Just trying to gauge how you think about that if an opportunity were to present itself. Thank you.

Yeah, Jeffrey, it's Patrick. Leverage, as we mentioned, I mean, obviously, we've stated obviously our goal is between two and a half and three and a half times, and we're outside that leverage range. And we expect to be back within that leverage range within the next several quarters. In terms of additional M&A, I mean, George can comment on this as well. I mean, obviously, we're always looking. We did comment that, you know, it's very active. you know, for right now our focus is on reducing that leverage.

Yeah, we spend a lot of time talking about this because we have so many opportunities today. We would certainly like to have lower leverage. I think it makes M&A more appealing to us when our leverage is lower. I don't think that as an organization that you should ever pass up an opportunity like Jose Santiago and an opportunity like Cheney, they don't come along very often. At the same time, we want to keep our pipeline growing. We want to handle our debt responsibly. We're trying to balance those things. But I think that you'll see continued M&A from us. But we'll be very cautious about how we're handling our capital structure. And then I also should add that, I mean, we've now been a public company for you know, for 10 years, but we've dealt with much higher levels of leverage than we have today. And we've dealt with that effectively. Now, I'm not sending a signal that we're going to get our leverage higher, not by any means, but I just want to make sure that people understand that this is not a high leverage for the type of business that we're in and the type of company that we are.

Can you clarify just what that leverage level is today versus the two and a half to three and a half?

Yeah, it's in the high threes.

Gotcha. Thank you very much. Thank you.

Hello. Hello.

Good morning. Hello. Yeah, I didn't hear the introduction. Thank you. Yeah, we have to. Go ahead. Thanks. So I wanted to do a couple of follow ups, if you will, on the increased, it seems, pace of hiring of salespeople. Is that kind of opportunistic or is it kind of more intentional, like, you know, putting the Reinhardt playbook into Cheney Brothers? How should we think about, you know, why you increased the sales rate? sales personnel rate.

Hi, Andrew. This is Scott. I'll take that. Let me start by saying I just came back a couple weeks ago from our VP of Sales meeting that we have nationally every year. The focus of that meeting was really fine-tuning our hiring process, our training process, and I walked away from that, you know, highly encouraged with, you know, what we have on the street as far as availability of hiring, you know, great AMs and bringing those people to the company. You know, historically, we've always been in that, you know, mid to high single digit hiring target range. And we're right now about 7%. So we feel good about that. And really, that's what's fueling our growth right now. If you look at, you know, same store comps are basically flat. Our AM headcount's up 7%, but our new stores are up 5%. And so that's really what's driving our case growth. So we'll continue to be opportunistic. and look to higher grade AMs on the street and get them trained up and, you know, continue to drive case growth.

Yeah. And I'll also say that we try hard to have a pretty consistent growth in the number of salespeople and have a kind of a consistent cadence there. But we don't make those decisions. So we have companies that I would say today, if I were managing it, I would be tapping the brakes a little bit on the number of salespeople. And, you know, they need to really dig into who they have. And then we have people that are behind and should have more salespeople. So we nudge and we talk to them and we try to have a real good cadence. But, you know, these are decisions are made in the field and we don't really have any desire to change that. uh, yes, we can, we can train better. So when you're doing it across a big organization, so we try to get some commonality there around what we do. Some of our people operate where they bring in four or five, uh, larger companies, maybe as many as eight at one time to, to, uh, make it more collaborative type of training. And you get to our legacy Roma companies and they're probably seldom going to hire more than one person at a time. So there aren't ground rules, I guess, with this. But we can tell from what our people are doing, from what they tell us, the confidence level that they have right now, I think we're going to continue in this kind of 7%, maybe a little more world as far as increases in salespeople.

Okay, thank you. Do you have a sense of whether that's sort of the proportion of folks coming from the industry versus folks you've got to really train up?

Has that shifted at all? Yeah, right now it's almost entirely people that are from the industry. Okay, thanks.

Just one more follow-up on what sounds like a pretty nice uptick in food service sales into the convenience channel. I just want to kind of underline that because I know you've had kind of fits and starts Is that driven by sales people and better, just more effective selling? Or do you have like newer, better, you know, food service programs that are gaining traction?

Yeah, Andrew, we have really two pathways into convenience. You know, one of those is through our convenience channel. And I think the biggest advantage that came with the acquisition of Cormark is, you know, PFG's ability to bring turnkey food solutions and food supply to convenience. And so our convenience channel, that's our fastest growing category in convenience. And they continue to do a good job, but I think we're still in the early innings there. And then the second pathway into convenience is through our traditional broad line, and that's growing significantly. And again, that's just that capability of having turnkey solutions, having a broad array of products, and really making it a focus. We're kind of hitting it from both sides and having nice success, you know, and I still think it's early on.

That's good. So it's, and I'm sure the vendors and everybody's focused in that direction. So it just sounds like that's a lot of incremental movement.

Yep. No, there's been a lot of focus on it.

Great. Thank you.

Thank you. We'll take our next question from Brian Harbor with Morgan Stanley. Please go ahead.

Yeah, thanks. Good morning, guys. Just maybe as a cleanup question, I think people aren't necessarily calibrated right on like interest expense and maybe just on depreciation, depreciation amortization. On that, do you think the prior quarter rate is good? Do you have sort of a range that you'd expect near term for interest expense? I appreciate that you have variable rate debt, but I don't know if you have some sense.

Yeah, hey, Brian, it's Patrick. It's a great question, and I know this has come up a couple of times. I think if you, obviously, as we mentioned, we closed the acquisition with Cheney Brothers in October 8th after the end of our first quarter, and that's when we drew down the ABL $2 billion. That's what's really driving the change in interest expense, and I would say that the Q2 numbers are definitely a good baseline to use going forward. for both interest expense and depreciation.

Okay, sounds good. When I look at sort of inorganic versus organic independent case growth also, is that kind of the gap we should expect going forward, or is there anything unusual about sort of the contribution that those two drove in the second quarter? Could you just sort of comment on that?

Yeah, there may be a little bit more of a spread in Q3 with both Jose Santiago and Cheney, you know, busier. Particularly February, March are big months for them. And then the spread will probably narrow again in Q4. And of course, as we get into next fiscal year, we would have lapped the Jose Santiago right at the beginning of the fiscal year, and we'll still have another 14 weeks of Cheney's impact. Okay, thank you. Yeah, and in Q1, that will, you know, it'll really narrow quite a bit. That's not the, you know, the peak time of year for Cheney.

Yep, okay, thanks.

Thank you. We'll take our next question from Jake Barlett with Truist Securities. Please go ahead.

Great. Thanks for taking the question. You know, mine was just on the 2005 guidance, and sales was increased by more than the beat from the midpoint in the second quarter, but EBITDA was raised by the same amount. So, essentially, you beat, you included that beat, but really didn't raise the back half of the year on EBITDA. So, I'm just trying to understand what drove that. Are there some incremental pressures, maybe some less profit flow through that we should expect for some reason in the back half.

Yeah, Jake, thanks for the question. I mean, again, when we look at what we raised on the top line, we're really confident in how the segments are performing in their sales performance. That gives a lot of confidence to raise it by $500 million, both on top and bottom. When you look at the $25 million increase to the bottom on the EBITDA, Again, we felt more confident in our EBITDA numbers, and again, we saw opportunity, but at the same time, there are some macro things out there that always leave us to make sure we're being a little bit more prudent. And then also, we saw a little choppiness in January. So again, lots of confidence in our numbers. And we'll continue to look at this closely and again, at the next quarter, we'll hopefully come up with some updated guidance for you.

And then we just had a question as well on just the drivers of the top line increase in guidance. And I guess versus your prior expectations, is your product cost inflation expectations, has that gone up? It seems like it probably likely did. So I'm just wondering to what extent the increased top line guidance is really product cost inflation being higher than expected or whether it's kind of underlying case growth.

No, it's really the latter. It's really the underlying case growth. Each of the segments performed well. We saw a really strong performance in food service that we've talked about quite a bit, and obviously Chaney and Jose continued to perform. But it was really, and then as Scott alluded to, we have a really strong pipeline, both in food service with national accounts and in convenience. So all these things are giving us, not only have we seen great results year to date, but also giving us confidence in the balance of the year.

All right. And then building just on the question that was asked before, but can you give us a sense as to what percentage of sales in EBITDA for Chaney and Jose Santiago come in the third quarter? You've mentioned it's a really big quarter for them. Trying to frame it out just so we can kind of understand the organic versus the growth drivers in the third quarter.

Yeah, I'm sorry. We don't have that number at our fingertips. It's probably something we should have calculated.

Yeah, what I can tell you, Jake, it's their largest quarter is Q3. where typically, historically, it would have been one of our smallest quarters for performance.

Got it. All right. Thanks a lot. I appreciate it.

Yeah, thank you.

Thank you. And we will take our next question from Peter Saleh with BTIG. Please go ahead.

Hey, great. Thanks. Most of my questions were asked and answered, but I did want to ask, Scott McAvoy- On the chain business I think he's seen some improvement in there, can you just elaborate on what you're seeing and change and maybe what's changed in the recent past, and then I have a follow up.

Scott McAvoy- yeah so Peter this is Scott so definitely we you know I think there's a couple things going on with chains. One is, you know, we have three or four chains that are really performing well, you know, seeing double-digit growth out of them and really helping to drive our national account business. And I'd say the other thing is, you know, we've had a little bit of a shift where, you know, we've had some national account business that wasn't great performing that we've traded out for national account business that is much better performing. So a little shift in our mix of customers across the national portfolio. So feel really good about how that's progressing. You said you had a second one?

Yeah, and then just a follow-up. I know you commented a little bit on the seasonality of Cheney and Jose Santiago, but just curious on the synergies that were laid out maybe several quarters ago, when should we expect to start to see some of those synergies come to fruition, particularly on the Cheney brothers' side? Thanks.

Yeah, and And Peter, this is Patrick. It's obviously very early since we just recently purchased Cheney Brothers, but I can tell you the integration efforts are in full swing, and we really are doing an excellent job. Both teams are working very well together. We did announce that we'd have $50 million of synergies at the end of the third year post-acquisition. So I would expect that the synergies will come later in the cadence. So we'll see some synergies in the first year, but we'll see more synergies in year two and three. But that's all the detail we have for you right now.

Thank you very much.

Thank you.

Thank you. And once again, as a reminder, that is star one for your questions. All right. And we will take our final question from Carla Casella with JP Morgan. Please go ahead.

Hi, just a couple quick follow-ups. You talk about debt pay down being the focus, and it looks to me like there's over a couple billion drawn on the revolver. So is that what you're focusing on paying down, or would you consider taking out the 27 bonds, which are now callable at par, ahead of maturity?

Yeah, Carla, it's a great question. Obviously, our initial focus will be right now to pay down the ABL, but we'll certainly look at those 27 bonds as well. But we tend to use the ABL as our main focus.

Okay, great. And then I may have missed this. You disclosed how much performance brand products represent now of your food service business, and if it's kind of at a target level, there's still more opportunity there?

Well, the number we give is what our – Brands are a percentage of our independent business, and that's the overwhelming percentage of our brands. When you get outside of our independent restaurant business. Most all of our business are chain restaurants that typically don't use many of the distributor brands. We make some progress there, but not what I would call meaningful. So we do very little business in health care and lodging. or in contract feeding that tend to use the distributor brand. So it runs right around 53%. I think it was 52.9 last quarter. We think that's a good number. We do see that being reduced as we add in Chaney Brothers and Jose Santiago. But once it recalibrates for that, we think we can march up from there. have several of our companies that are over 60% right now. So we do see that there's room for improvement. And if you get into our legacy Roma companies, many of those are over 60%.

Okay, great. And that's all 60%, 32.9% of the independent business.

That's correct.

Okay, great. Super helpful. Thank you. Thank you.

No further questions at this time. I'll turn the call back to Bill for any closing remarks.

Thank you for joining our call today. If you have any follow-up questions, please reach out to Investor Relations.

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