Q1 2020 Earnings Call

Fiscal year Q1 earnings.

Earnings Conference call.

I'd like to asking question at the conclusion of the prepared remarks, please [laughter], Turkey fell by the number one I your telephone keypad at any time.

I'd now like turn the call on for.

I called me Vice President Investor Relations for P.S.G.. Please go ahead Sir.

Thank you posture and good morning.

We are here this morning, with George Holmes Pip Jesus CEO .

And Jim Hope.

Food groups CFO .

We issued a press release regarding our 2020 fiscal first quarter results. This morning.

The results discussed in this call will include GAAP and non-GAAP results adjusted for certain items.

A reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found at the back of the earnings release.

You can find earnings released in the Investor Relations section of our website at <unk> PM GE Si Dot com.

Our remarks in the earnings release contain forward looking statements and projections of future results.

Please review the cautionary forward looking statements section in today's earnings release.

Interestingly FCC filings for various factors that could cause our actual results to differ materially from our forward looking statements and projections.

And finally, our fiscal 2020 outlook does not include any benefit from the acquisition of Reinhart.

Now I'd like to turn the call over to George.

Thanks, Michael Good morning, everyone and thanks for joining our call today I'd like to go over a few first quarter business results.

Jim will discuss our financial results an annual outlook in more detail and then finally I will provide a quick update on the Reinhart acquisition.

We'll take your questions.

Now lets turn into our results. After successful fiscal 2019, we're pleased to share that our strong growth continued in the first quarter fiscal year 2020, total case volume increased by 10.7% driven by you'd be ground broad based growth across vistar sales channels, 5.6% increase.

And independent cases and growth in performance brands.

Our foodservice segment generated EBITDA growth of 13% different by its customer centric focus and continued strategic investments in both people and technology.

In fact, the foodservice segment grew its EBITDA by double digit the past two quarters and our fiscal 2020 Q1 represents our fourth consecutive quarter of sequential adjusted EBITDA growth.

I think this demonstrates the strong execution of our performance food service team.

The mid single independent case growth for the quarter was inline with our expectations. We're pleased to report that the trend is continuing into the.

The early weeks of our second quarter.

And this growth is quite strong against the backdrop of flat same store sales growth for independent restaurants.

During the quarter, we continue to believe the overall health of independent restaurants remains strong.

Shifting to Vistar, we delivered another quarter of strong top and bottom line results fueled by broad based growth across their sales channels also happy to report that had haggerty into seem were recognized by the international Foodservice Manufacturers Association last night, and given an excellence and distribution ward.

Based on our strong start to the year, we're pleased to increase our full year adjusted EBITDA outlook, Jim will further discuss our outlook later during this call.

Let's turn to our two segments for the first quarter net sales for Vistar increased 158.9% to 2.3 billion compared to the prior year period. This increase was driven by.

The acquisition of VB Brown and sales growth in the segments of corrections vending theater and office coffee.

First quarter EBITDA from Vistar increased 63% to 51.5 million versus the prior year period gross profit dollar growth of 67.1% in the quarter was fueled by the acquisition of DB Brown than an increase in the number Keith so.

Our either ground business integration continues to go well there have been some modest operating cost savings realized immediately post close the teams are working on developing more opportunities overtime. One thing that is quite exciting is that performance foodservice need be brown developed two new foodservice programs for the convenience Reid.

Tail trade [noise].

And we debuted these programs at the next industry trade show.

October in Atlanta, the programs had very high levels of interest among our customers.

We believe this acquisition will allow pfcs vistar segment to strategically expand in the fast growing convenience store channel, where there are significant opportunities to use PFT brands for unique solutions.

And what is today 40 billion dollar convenience foodservice Mark.

We believe our strategic growth investments in people and technology are paying off and continue to be on track to support our long term objectives as demonstrated by the consistent financial results from both the foodservice can distort business segments.

[noise] each quarter. During these calls we like to highlight one associated goes above and beyond to serve our customers and colleagues.

In September one of our performance foodservice.

Truck drivers was among 200 stranded motorists and southeast, Texas, when tropical storm Imelda made landfall.

Our CDL delivery driver named Reggie Macquarie.

Who was one is way to deliver food and staples to a customer called as manager and got support to share what was the one is truck.

With the stranded motorist.

He had from a water to milk to paper goods with the assistance of another driver who had a grill Reggie served up chicken wings chips and more to feed those who would not have had anything to eat during what ended up being a multi day really closure.

I think it was a great that Reggie had the confidence to call and asked for permission to do that and that the transportation supervisor was comfortable to approve that.

[noise] [noise] with that Im going to turn things over to Jim and he will give you more detailing our first quarter. Thank you George and good morning, everyone.

Our first quarter results were strong with the topline and bottom line growing at a healthy pace.

Total case volume increased 10.7% for the first quarter compared to the prior year period with underlying organic growth of 3.2%.

Net sales for the first quarter of fiscal 2020 grew 37.5% to 6.2 billion compared to the prior year period.

The increase in net sales was primarily attributable to 80 Brown broad based growth across sales channels in Vistar and case growth in foodservice, specifically in the independent restaurant channel.

The acquisition of Baby Brown contributed 1.4 billion to net sales for the quarter, including 291.7 million related to tobacco excise taxes.

The increase in net sales were also attributable to an increase in selling price per case as a result of inflation in mix.

Overall food cost inflation was approximately 2.8%, especially in the center of the plate items, such as cheese meets poultry and produce.

Gross profit for the first quarter fiscal 2020 increased 19.8% compared to the prior year period to 711.4 million.

The strong gross profit increase was led by recent acquisitions as well as case growth from an improved mix of customer channels and products, specifically in vistars channels and of the independent restaurant channel.

Gross profit per case is up 37 cents in the first quarter versus the prior year period gross profit margin as a percentage of net sales was 11.4%.

For the first quarter compared to 13.1% for the prior year period.

The gross margin decline it was driven by Avi Brown, who experienced lower margins as a result of tobacco gross margins would have been up slightly excluding Avi brown.

Operating expenses rose by 19.3% to 647.9 million in the first quarter compared to the prior year period.

The increase in operating expenses was primarily due to the acquisition of VB Brown, an increase in case volume and the resulting impact on variable operational expenses.

Operating expenses also increased in the first quarter as a result of increases in personnel expenses and professional and legal fees, resulting from the Reinhart acquisition.

Net income for the first quarter grew 28% year over year to 36.1 million. The growth was primarily a result of the 12.9 million increase in operating profit.

Which was driven by our gross profit increase partially offset by a 3.1 million increase and the income tax expense.

The effective tax rate in the quarter was approximately 21.9% compared to 20% and the first quarter of fiscal 2019.

The increase in the tax rate versus the prior year was due to an increase in nondeductible expenses and state income taxes.

EBITDA increased 23.1% to 106.2 million in the first quarter.

For the quarter, adjusted EBITDA rose, 33.7% to 127.7 million compared to the prior year period.

Diluted EPS grew 25.9% to 34 cents in the first quarter over the prior year period, and adjusted diluted EPS increased 47.1% to 50 cents per share over the prior year period.

Turning to our cash flow PSG generated 84.2 million in cash flow from operating activities, an increase of 51.9 million versus the prior year period.

The improvement in cash flow from operating activities was largely driven by higher operating income and improvements in working capital.

For the first quarter, PSG invested 22.8 million and capital expenditures.

A decrease of 2.2 million versus the prior year period.

PSG delivered free cash flow of 61.4 million, an increase of approximately 54.1 million versus the prior year period.

Turning to our fiscal 2020 outlook, we increased our adjusted EBITDA growth to be in a range of 10% to 14% versus our previously announced a range of 9% to 13%.

Fiscal 2020 organic adjusted EBITDA is now projected to grow 8% to 10% versus its previously announced range.

Seven to 10.

The increase in adjusted EBITDA guidance is driven by stronger fiscal first quarter results.

In foodservice and in Vistar.

She adjusts its fiscal 2020 adjusted diluted EPS, the increase in a range of 5% to 10%.

This is its previously announced range of 4% to 10%.

The adjusted diluted EPS forecast includes carrying costs associated with the notes offering for the Reinhard acquisition.

The increase carrying costs net of taxes.

Impacts adjusted diluted EPS by approximately seven cents per quarter.

I'd like to briefly share where we are in terms of the FTC review with our Reinhart acquisition.

We filed for HSR approval at the end of July and received a second request from the FTC on October Onest.

We have had good engagement with the FTC throughout the process and are responding to their remaining questions.

The process is moving forward as anticipated and we still expect to close the transaction by the end of the calendar year or in early 2020.

We feel good about how the process is moving along at this point and we believe we will meet our expected closing schedule.

In summary, our first quarter financial results were solid.

We are pleased with a strong topline growth in our businesses and the sequential improvement in foodservice is EBITDA results.

We expect vistar to have another year of solid topline an EBITDA growth.

And although it's early in our fiscal year I feel confident that PSG will deliver another consistent year of strong growth.

And with that Im going to turn the call back to George Thanks, much Jim.

So to wrap up we've had a strong start to fiscal 2020, our strategic initiatives are on schedule and our operational execution.

At the highest it's been over the past several years foodservice and vistar hitting on all cylinders both segments are executing their strategies.

We remain excited about our Reinhart acquisition, we continue to expected to close by the end of this calendar year or early in 2020.

We believe there will be meaningful opportunities to deliver synergies with our you'd be brown acquisition and with our Ryan Howard acquisition, our businesses or can you perform at or ahead of our expectations.

Finally, I want to thank all of our associates for their focus on our customers in the potential growth we have in front of us with that we'd be happy to take your questions.

Ladies and gentlemen, as reminder, ask your question. Please press Star One. Your first question is from the line of John Heinbockel with Guggenheim Securities.

George Let me start with.

We will roughly speaking.

Salesperson the growth of the Salesforce.

Where is that now were where would you like it to be by year end and are you seeing any change in quality of.

Person that.

Your interviewing from your competition or outside the industry.

I wouldn't say that we're seeing any any difference in the quality of the people.

I would say that kind of the last group that we brought on to really get caught up where we want it to be in our growth and people took a little longer than we had expected to get to the level of productivity were used to.

But I think that if we can grow our people.

At a rate and which.

50% above that rate, we can grow as a company will be in very good shape to continue with this mid single digit case growth.

Okay.

And then maybe secondly, I know this year you guys made some changes to the.

The incentive compensation effort.

Putting in or moving from EBITDA to EBIT and then.

Putting in a free cash component.

Maybe just talk about the balance right between growing top line.

Being.

Stewards of Capex and.

Improving ROI.

We bounced back going forward.

Yes, John I don't think anything changes in the balance where we are heavily focused on sales growth. It's important to us the quality of sales growth has always mattered as well.

The changes in the top system in the program just give a little nod to making sure we do what's right for our shareholders and look at.

The financial statements more holistic Liam we deliver on free cash flow as we want to de lever.

Okay. Thank you.

Your next question is from the line of.

Kelly with Wells Fargo.

Hi, guys, good morning, and congratulations on a nice quarter.

The first thing I wanted to ask about is gross profit per case I feel like maybe I didnt even hear this number right. When you said 37. Thanks.

Can you just maybe unpack.

What's driving that and then how should we think about that going forward.

Yes, I'll take that question.

We did have an improvement in our gross profit per case, excluding the acquisition of E. B Brown, but it was a modest improvement and we've always improve that number it's been primarily through the change in mix of business.

And this quarter was really not much different but when you go to the convenience business, it's highly impacted by tobacco and tobacco is such an expensive.

Product.

That the gross profit per.

Case is just so much higher.

Okay. So the the or I guess, if we were thinking about organic gross profit per case progress there similar to what you've been doing.

Yes, it is and.

We'll live with this unusual comparison for.

Two more full quarters, and then for a partial quarter and then the comparisons will be a little bit easier to to determine.

And then I wanted to ask you about guidance I mean, you obviously had a great Q1.

EBITDA growth.

North of 30% well exceeded expectations.

The only raise the full year EBITDA guide by <unk> percent.

Is there anything that makes you more cautious for the rest of the year than maybe what you thought a quarter ago or is this just a function of its Q1 and you are typically conservative if you could just sort of help us understand that that'd be great.

Yeah, it's more the letter it's early in the year since Q1, so long year, we've been in industrial long time and.

Look we came out with seven to 10 as we usually do and we took seven off the table. It's it's now eight to 10 organic and.

And we feel good about that if we see a change of will will definitely come back and.

And modified but it is early in the year.

Hey, we're coming off.

I think the other thing I'd add is we're coming off a really strong Q1.

We feel great about our business fundamentals as George mentioned, our independent customers continue to perform well good spot.

Okay, and then just one other thing on the guidance that I wanted to clarify here Jim.

You raised EBITDA and then you raised EPS also by kind of a little bit but you introduced.

Seven cents per quarter of carrying costs on the debt.

And I'm just trying to understand how.

EBITDA and EPS, both kind of go up by the same amount, even though seven cents is a lot.

Are you basically saying that it's seven cents a added cost until the deal closes is that what you're saying here.

That's right seven cents carry costs them on the.

On the bonds that we secured.

Okay. So if it closes at the end of this year.

It's really just single like probably around seven Centsthree touch higher is what you're saying.

You are thinking about that correctly.

Okay, great. Thanks, guys.

Thank you thanks.

Your next question comes from the line him to the Frommer with credit Suisse.

Good morning, guys. Thanks for taking my question I just wanted to see if you could help us with color Subservice, specifically on the local side of the business in any changes.

Seeing there you know churn has always been an important part.

But you need to sell into new doors, and the balance of new customers and penetration of existing ones.

Yes, we've seen very little change there the only thing I would say is that.

We're adding new business set a slightly less rate.

And we used to and our loss business. This at a slightly less rate than it has been in the past.

But you put the three together the new business and the loss business.

And.

And the penetration.

And we're running about where we have been for the last six quarters has been fairly consistent and we're seeing that sees consistency so far this quarter.

Okay, and then just just anything on on pricing both from a competitive standpoint and.

With inflation flowing through to customers is there any push back on that side.

No I mean, we've always been in a real competitive industry I don't think theres really been any change per se.

The inflation rate is probably a little bit higher than we'd like to see.

When you when you get close to 3% it can be a little bit more difficult to get those prices in into the customer, but so far so good.

Okay, great. Thanks, and good luck.

Your next question is from the line of Jeffrey Bernstein with Barclays.

Hi, this is actually Jefferies.

Thanks for the question.

Just on the sequential trends through the quarter. Both your main public competitors mentioned.

Different points in the quarter and you guys mentioned last quarter material through very strong start this quarter I was just wondering if.

It was little more color as to what you thought throughout the quarter.

Order of.

As far as well.

Yes, it was pretty consistent through the quarter.

July and September a little bit stronger with independent than August was.

It's pretty consistent.

Great and then just on that.

Just with all the headlines surrounding the beeping illnesses in the quarter.

Doing any negative trends in the tobacco business forward, but overall.

Yes, no we are and.

We're continuing to run the company. We're pleased with the results, we see out to BB Brown and look forward to Goodyear from them.

Yes.

Your next question comes from the line of Christopher Mandeville with Jefferies.

Hey, good morning.

George can we start off with food service in the quarter itself and showed some nice quarter over quarter improvement.

Independent cases.

That is and then overall segment EBITDA move nicely sequentially as well, but.

Total organic cases actually slowed a bit on two years. So maybe just help us understand what's going on with the casual dining environment relative to prior quarters, an expectation that.

Well the casual dining.

Our casual dining business was difficult.

Once again I say this all the time, because it's really important thus, we don't comment on individual customers, but as a whole our chain casual dining.

Business was still is a somewhat difficult quarter.

More so than it has been in prior quarters or.

No actually similar.

Okay and then.

Jim I apologize if I missed this but can you maybe help parse out the overall EBITDA growth and Vistar. So the $20 million in year on year improvements, maybe break that down between the organic performance Brown in any type of onetime benefits realized.

Yes, sure first I think.

You know that we don't separate.

The Brown of Vistar, We report them as a segment and we've disclosed the topline on ebay Brown for you I think it'd be important to know that there is $5.6 million gain on tobacco excise stamps.

In the quarter that happens occasionally and to the extent, it's material will disclose it we don't expect it.

Again anytime soon.

And.

I probably leave it at that I think that gives you the color around it I would say, though that vistar itself.

Has really performed well the organic businesses performed well, we expect that to continue.

Okay. If I could just follow up really quickly can you remind us how that excise tax stamp floated PNM and then also.

Correct me, if I'm wrong here, but I believe there's going to be a third cigarette price increase that take place in calendar Q4. So she would be looking forward to that and is that in fact reflect any updated guidance.

So in the latter it's not reflected an updated guidance and I certainly not as spot where I can predict or count on that to happen I know in the past.

Most of thought it would happen until it happens sooner or later, so it's really hard to put a pin on one that will occur.

The tobacco excise tax staff gain flows through the piano an opex.

And.

That 5.6 million as disclosed in our Q and yes that that is included in our guidance.

Great. Thanks, guys.

Your next question is from the line of Marisa Sullivan with Bank of America.

Hi, Good morning, Thanks for taking my question I wanted just to pick up with the stars organic growth and just.

A little bit more color on some of the drivers there I know you called out correction.

In the press release.

At the beginning.

A small part of your business, but you did call. It out so are you seeing anything different there and then on the new programs that Youve announced with.

Foodservice convenience foodservice when do you think you'll start to see an impact from that thanks.

Well.

Starting with the first question.

Well not actually let me start with the second one.

The programs, we put together I mean is really early.

We had tremendous amount of traffic at our booth a lot of that was driven by a pizza program that we were introducing.

And.

We have some early wins with that but it's not anything that I would call significant at this point.

Then as far as as where Vistar has been growing.

We're fortunate there that that all the channels right now are in different levels of growth.

From very low single digit to double digit growth.

Our shares probably less than corrections than anywhere else, so thats getting a little bit little bit better growth.

But every channel we have today is in a growth mode.

Gotcha and have you seen any changes in your theater business given the.

Movie release calendar.

And performance yes.

It was very very slow growth.

And there's been less I guess I would say big name movies that have come mountain and there's been a couple of that haven't done as well as expected.

But we are anticipating a very good holiday season with both the frozen movie coming out that's always been been a big hit or at least the first one wasn't we believe the second one will be and of course, we have another star wars come in which which usually is.

Very good for for our Vistar company.

Great. Thanks, so much.

Your next question is from the line of Kelly Bania with BMO capital.

Hi, good morning. Thanks.

Taking the questions.

Just wanted to George ask about technology, you mentioned it in your opening remarks, so well just curious if you could just given an update on where you are with online ordering with the automated facilities I think the second one is coming online this year and anything else you would want to note.

Well, we've put some some.

Warehouse and delivery.

Systems and that that have helped us the biggest one being what we call truck builder, it's it's something that is.

Been around the industry for while we thought we were at a point where people were ready for the system was was where it needed to be that's been a big help for us.

Our online ordering.

It typically goes up as a as a percentage of orders coming in about 1% to 2%.

Quarterly and we're right in that same range again this quarter and then when you that's for independent when you get outside of the independent we're we're very close to 100% our business being online.

The automated facilities.

We have one today also problematic getting up and going.

Once we did it's been very successful for us.

That facility is at a higher level of profitability than our average.

Star facility. So we have one that's fairly far along we'll talk more about it when our next call and then we have a third one that we're actually in the early stages of as well, it's something that we're excited about we believe.

Wanted to be real effective and vistar with.

Deliveries all the way from Fedex GPS delivery to 52 footer and we have reached that point, we're very effective all the way along.

That.

That path from a very small order two very large order.

<unk>.

And.

So just maybe an update on on wages, particularly that warehouse and driver.

Employee and what you're seeing is that stabilizing or do you anticipate anymore investments in that area going forward.

We don't anticipate anymore investments.

Certainly if we're having issues getting people were going to address that we're going address it immediately.

We are doing well right now our turnover it's been better.

Particularly better with drivers I think we're doing some things that that have helped with with our driver base.

But I wouldn't say, it's easy but by any means that meters theres still a shortage, we could still use more drivers, but it's getting better.

Thank you.

And our final question is from the line of bought some nice with Buckingham.

Okay. Good morning, guys. So just on that on the convenience space.

Look a lot has been written again about Amazon entering that that sector I feel like we just got done this proving it on the food service side I'm curious if the barriers to entry in the same with respect to having to operate multi temperature trucks high service components skew sized drop size.

Optimization, I mean, clearly you never want to underestimate Amazon, but I'm just wondering if for.

It's the same issues just that difference upside on the sector.

Well I'll second that the you don't want to underestimate and that is for sure.

But if you look at the delivery is different in a convenience store than it is to say foodservice operator, but it's still very complex delivery time is very important three temperatures are important.

So there's not a great deal of difference between the two.

And.

We just we just don't underestimate it we just need to get better and better what we do and I think we'll be fine.

Okay and then just.

Circling back to the guidance one one point of clarification in in the current outlook are you looking at one one quarter of the carry cost or multiple quarters I think it's basically what it almost a four percentage point drag to the current growth rate, if it's one quarter, but clearly more if not.

Yes, our our.

Outlook reflects the same perspective, we have on the closing timing of the deal which is.

Close into the calendar year early 2020, we wouldn't have one quarter.

Okay. Thank you.

Thanks, Bob.

Ladies and gentlemen, there are no further questions now, let's turn the call back over to you say.

Thank you have a great day bye bye.

Thank you ladies and gentlemen. This concludes today's conference call you may now disconnect.