Q2 2020 Earnings Call
Inclusion of the prepared remarks. Please press the star keep followed by the 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 P.S.G.. Please go ahead sorry.
Thank you Laurie and good morning, well here. This morning, with George Holmes kept <unk>, CEO and Jim Hope PFT CFO.
We issued a press release regarding our 2020 fiscal second quarter in first half results. This morning.
The results discussed in this call will include GAAP and non-GAAP results adjusted for certain items.
Reconciliations of these non-GAAP measures to the corresponding GAAP measures can be found at the back of the earnings release, you can find our earnings release any Investor Relations section of our website P.F. GE Si dot com or marks in the earnings release contains forward looking statements and projections of future results.
Please review the cautionary forward looking statements section in today's earnings release, and our SBC 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.
We're enjoying your from southern Florida, where we're hosting the annual Presidents' meeting with our field leadership organization over the past few days, we've discussed our vision for success nine through with the level of excitement across the entire organization. As you know our company has been busy growing our legacy business, while expanding into new channels and territory.
Through acquisitions, including E Brown and Reinhart.
Today, we will provide an update on how these initiatives have progressed. We also look forward to speaking at the Cagney conference in a couple of weeks, where we provide more detail into our vision and strategy for P.F. G.
But first I'd like to start, but we're doing some highlights of our second quarter business results before before providing a quick update on the Reinhart acquisition. Jim will then discuss our financial results and annual outlook in more detail and then finally, we'll be happy to take your questions, Let's turn to our results after a strong start to the year.
Please to share that our sales and EBITDA growth continued into the second quarter fiscal 2020.
Total case volume increased by 6.7%.
Driven by the Brown acquisition, a 4.9% increase in independent cases and growth in performance brands.
We're pleased that are independent case growth for the quarter continue to the mid single digit range, which was in line with their expectations. We believe we will be able to achieve our long term objectives with this level of independent case growth in our legacy business.
As we look ahead, we expect reinharts level of independent case growth to be below the mid single digit range in the short term, but will accelerate overtime to be more in line with our legacy business.
We continue to believe the overall health of independent restaurants remains strong and we'll continue to be a key driver of our long term profit growth as you know we closed the reinhart acquisition in late December.
Completing detracts Ics transaction by the end of our calendar 2019 physical quarter to we're excited to add the reinhart business to our organization and welcome to many talented reinhart associates to the PMT family of companies.
Reinhart brings over $6 billion, an annual net sales, taking p. of cheese annual revenue run rate to approximately $30 billion. The transaction increases our foodservice division scale distribution platform, particularly the independent channel.
Market density.
Overtime, we expect us to improve our network efficiency.
Reduce mileage and create additional sales opportunities as we share best practices. We're also excited about the cultural fit between P.S.G. and Reinhart both organizations go to market with a focus on success with the customer level.
We believe that we'll be able to enhance reinharts operations and increase the combined company step.
Differentiated private label brand offerings. The increased density of our combined sales associates will also enable more face time with customers and should reduce future operating expense.
Run out also brings a diverse customer base, including independent restaurants health care providers education, another attractive end markets.
We believe that these strategic merits will strengthen our combined business and increase shareholder value over the long term.
While we were just over a month from the completion of the transaction integration is going very well and we're pleased with the progress that has been made bringing these two great companies.
Each quarter. During these calls we like to highlight one associate who goes above and beyond to serve our customers and colleagues today, we'd like to recognize one of our new associates, joining the P.S.G. family from Reinhart.
John Hayes is a shuttle supervisor base out of the Columbus, Ohio, Yes, 30 years of experience in foodservice, including time as a driver lead.
And driver trainer and has been a supervisor for the past eight years.
When pizza chain Reinhard announced the acquisition John was quick to contact all just drivers I met with key customers in the Columbus market.
His efforts have ensured that both customers and drivers are in tune with reinharts transition to P.S.G.
Level of enthusiasm commitment to success and overall positive attitude are important reason why we continue to win in the Columbus in Dayton areas.
Whenever two companies the size of P. Ftn Reinhart come together, they're sick nipigon amounts of work that needs to take place to ensure smooth transition.
It is stories like this that give us confidence in the future success for our company I'd like to personally thank John and all the associates, who put in hard work everyday to make our company great would that I'm going to turn things over to Jim will give you more detail on our second quarter results. Thank you George and good morning, everyone. Our second quarter results were strong.
Net sales and EBITDA growing nicely.
Total case volume increased 6.7% for the second quarter compared to the prior year period underlying organic case growth was 0.7% in the second quarter.
Net sales for the second quarter fiscal 2020 improved 31.5 per cent compared to the prior year period to 6.1 billion. The increase in net sales was primarily due to E. B Brown and sales growth in Vistar and case growth in foodservice, particularly in the independent.
Restaurant channel.
The acquisition of BB Brown contributed approximately 1.3 billion to net sales for the quarter, including 267.3 million related to excise taxes.
The increase in net sales was also attributable to higher selling price per case, as a result of inflation and mix.
Overall food cost inflation was approximately 3% and the second quarter, especially in the center a plate items, such as cheese meats and full.
Gross profit for the second quarter fiscal 2020 increased 15.7 per cent compared to the prior year period 711.2 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 to the independent restaurant channel.
Gross profit per case was up 39 sits in the second quarter versus the prior year period gross profit margin as a percentage of net sales was 11.7% for the second quarter compared to 13.3% for the prior year period.
The gross margin decline was driven by the addition of VB Brown, which has lower margins due to tobacco sales.
Operating expenses rose by 16.5% to 630.7 million in the second quarter compared to the prior year period.
The increase in operating expenses was primarily due to the acquisition of ebay Brown, an increase in case volume and the resulting impact on variable operational expenses.
Operating expenses also increased in the second quarter as a result of increases in personnel expenses EBITDA increased 13.8% to 125 point 124.5 million in the second quarter and adjusted EBITDA Rose, 22.2% to 100 and.
42.9 million compared to the prior year period.
Net income for the second quarter declined 4.4% year over year to 41.2 million.
The decline was primarily the result of the 10.4 million increase in interest expense.
Partially offset by the 7.5 million increase in operating profit.
The increase in interest expense was primarily the result of additional debt issued to help finance the Reinhart acquisition.
The effective tax rate in the second quarter was approximately 24.2% compared to 23.4% in the second quarter fiscal 219.
Diluted EPS declined 4.9% to 39 cents in the second quarter over the prior year period.
And adjusted diluted EPS increased 9.4% to 58 cents per share over the prior year period.
Please note that Pf g.'s definition of adjusted diluted EPS now excludes the effect of intangible asset amortization expense.
Please see this morning's earnings press release for GAAP to non-GAAP, reconciliations and restated adjusted diluted EPS for prior periods.
Let's turn to our second quarter results for our two segments net sales for Vistar increased 135.6% compared to the prior year period to 2.2 billion.
This increase was driven by the acquisition of VB Brown and sales growth in the segments of corrections vending and office coffee channels.
Second quarter EBITDA for Vistar increased 24.7% to 56.6 million versus the prior year period.
Gross profit dollar growth of 49% in the quarter was fueled by the acquisition of Libra.
Our foodservice segment generated fiscal second quarter net sales growth of 4.8% to 3.8 billion.
The customer centric focus and strategic investments in people and technology.
Drove EBITDA growth of 8.9% in the second quarter.
Turning to our cash flow in the first six months of fiscal 2020, PSG generated 157.8 million in cash flow from operating activities.
The increase of 87.8 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 six months PSG invested 49 million in capital expenditures.
Decrease of 11.1 million versus the prior year period, PSG delivered free cash flow of 108.8 million an increase of approximately 98.9 billion versus the prior year period.
I'd like to briefly comment on Ryan Art.
And the impact we expect on our financial results.
As we've previously disclosed we expect to achieve approximately 50 million in annual run rate synergies in the third full fiscal year, which represents our fiscal 2023.
We will act prudently to integrate these two companies and expect to ramp to our 50 million target fairly consistently across the first three full fiscal years.
Savings will come predominantly from procurement opportunities with the balance from operations and logistics.
Also as you consider your model, we wanted to provide some insight into reinharts business seasonality.
Given their geographic footprint, which skews more towards northern us compared to PSG. His legacy business Reinharts profit contribution over index during our fiscal fourth quarter and fiscal first quarter and under index in fiscal two Q in Threeq you.
Specifically approximately 60% of their EBITDA is realized from April through September representing our fiscal fourth and first quarters.
Right Arts EBITDA contribution is lowest from January through March representing our fiscal third quarter.
Turning to our fiscal 2020 guidance, we increased our adjusted EBITDA growth outlook to be in a range of 27% to 33%. The new range includes contribution from ebay Brown and two full fiscal quarters from Reinhart.
Fiscal 2020, adjusted EBITDA, excluding reinhart, but including a b brown is projected to grow 13% to 16% versus our previously announced range of 10% to 14%.
PSG also updated its fiscal 2020, adjusted diluted EPS guidance to a range of $2 in 17 cents.
The $2 in 28 cents representing growth of two to seven per cent compared to adjusted diluted EPS of $2 in 13 cents in fiscal 2019.
As previously noted all past and future adjusted diluted EPS figures.
Including the guidance range excludes the effect of intangible asset amortization expense.
This guidance is based on the following assumptions for the full fiscal year 2020.
Organic case growth in a range of 3% to 5%, which excludes contributions from maybe brown and reinhart.
Interest expense in a range of approximately 115 million to 120 million at an effective tax rate on operations of approximately 26%.
PSG also expects capital expenditures to be between 180 million and 200 million with depreciation in a range of 175 million and $185 million and amortization at a range of 65 million and 75 million.
In summary, our second quarter fiscal results were solid we're pleased with the consistent topline growth in our businesses and the strong EBITDA results for both our foodservice and Vistar segments. We continue to feel confident that PSG will deliver another year of strong growth.
That we'd be happy to take your questions.
Thank you at this time I would like to remind everyone. If you would like to ask your question. Please press Star then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from Mickey you press the pound key.
First question comes from the line of John Heinbockel of Guggenheim Securities.
Hey, George can you maybe talk to another two unit for a month.
What do you think the cadence of investment in Reinharts Salesforce will be and then the timing of where the progression of independent case growth was it two.
To your timeframe to get to.
Close to the mid single digits is longer than that thoughts on on both would be great.
Yes.
I wouldn't expect it to take two years, so I don't want to underestimate what's involved here, but I wouldn't expect it to take that long.
We certainly need to make some investments in people.
And.
To a degree.
Things just about how they approach the marketplace.
It's basically what we expected it to very well run company. That's just struggled to grow to grow that topline, particularly an independent.
And we feel as we put.
Right.
Number of people in place with the right training that that we'll get there and what we plan to do is continue to give.
Our organic.
Independent growth until we have lapped the reinhart.
Sales, we know we have some some work to do around making sure that we align exactly what what.
We always reported as an independent customer.
To do that with their numbers and then once we get through that four quarters, then we'll be putting out just our.
Organic growth as we always have.
Can you think you would get their salesforce.
The growth in their sales force up to what.
Five or 6% in the next nine to 12 months or we're not that high.
Probably not that high but certainly certainly at least three.
We do have a situation where theyre average sales person does a fairly significant.
Amount of business less than ours. So we feel that just getting people up to a higher level of weekly sales themselves.
The equivalent of adding people so.
Recover there.
Then just lastly, the the implied second half EBITDA guide.
Right is below your historical algorithm right, which has been more high single digit.
Is there a reason for that or is that just because we're only grew only six months in.
We've got.
Potentially weather impacted third quarter in front of us.
Yes, that's that's exactly right John will look we feel good about the guidance range, we provided today.
As I mentioned in his prepared remarks, reinhart smallest quarter from an EBITDA contribution standpoint, as our fiscal Q3.
So some of the impact to seasonality and.
This you always looked at a two year stack on Q4 for us you're right.
Okay. Thank you.
I should mention another thing thats not necessarily seasonality, but.
We have a stub period coming up of six months.
And I found in acquisitions that.
Typically people have a higher level of earnings and that last month of the fiscal year part of that reconciliations, but a lot of it growth programs.
So we do expect.
That when we get into next fiscal year, a little weaker from a comparison standpoint fiscal second quarter, just trying to get ahead of this for reinhart, but a stronger fiscal fourth quarter.
For Reinhart as as we get these programs to match up from a fiscal year standpoint.
Your next question comes from the line of Edward Kelly of Wells Fargo.
Hi, guys good morning.
So George if I look at.
Total organic case growth this quarter.
Was a little soft can you provide a bit more color.
On what occurred here.
What you're seeing in January and then you maintained your full year outlook for 3% to 5% you're running at about two right. Now so can you break justice as to how you.
Still achieve that three to five.
Yeah.
A 0.7 real growth is certainly not where we wanted to be.
Although the quality of that growth was was very good.
What we saw was a week.
December in theater part of it being.
Kind of the product that was out there and part of that being one less week between Thanksgiving and Christmas which is typically the.
The peak for Theatergoing.
We also saw in that same period of time, some real weakness in some of the casual dining chain business that that we do and we also saw some weakness in value stores in more of that.
Yes, I was having one less market with our largest value customer.
But obviously the earnings held up extremely well and I think that speaks to.
The quality of the growth that we did have we also saw some inflation, which helped us but we saw increase average case price in independent go up.
More than we saw the inflation so.
4.9% increase in cases.
We ended up having a 9% increase sales so I think that helped us a lot.
We have a good pipeline.
The people to run or two main businesses are confident in that pipeline. They have so we elected to.
To keep that 3% to 5% we have seen in the month to January things go back to this kind of pre unusual holiday period.
We try not to get to encourage with anything in January because it can be so weather related we really havent had weather issues, but I will say also we didnt last year.
So we're encouraged but we just try not to put too much into how things go in the month to January but I think when we get through our fiscal Q3 will have a much better idea how the years going to develop.
Okay and.
I also wanted to ask you about case level profitability performance. So let's club gross profit per case, I mean, you seem to be doing really well so slow almost like silly question, but can you talk about X E Brown.
What what's happening with gross profit per case.
How are you doing with the pass through of inflation was a large peer of yours to sort of called that out, which I think surprised everybody.
And then what you're seeing generally in the competitive environment, how it's just impacting at all.
I would say that.
When it came the dairy and meat, we probably had similar difficulty passing it through.
That helped US is that we just had such a good mix of business and it was the high case cost items, which come with some times lower margin, but more gross profit per case, and that's where.
Our heavy growth was I think it's probably any more complicated than that.
But it is a little bit more inflation and then we would like to see in the industry.
Okay. Thank you.
Your next question comes from the line of Kelly Bania of BMO capital.
Hi, good morning.
George and Jim I guess as you look at your your core food service fleet now with Reinhart granted only a month and I'm. Just curious if you could talk a little bit about capacity your own capacity, our their pockets, where you see opportunity to add or maybe have too much and then also from a competitive standpoint.
Do you see any changes in terms of competitors building out capacity in certain regions.
Well, we would always like more capacity and.
Certainly we have many things in the pipeline and many things that are being constructed right now it just seems to be slower process than it's been in the past as far as competitors, adding capacity, we don't see too much of that.
I know, there's a large when going in in the Midwest area, a large facility.
Theres, a larger and going into.
Canada Southeast calls area and then we also have competitors is putting a large facility in Denver. So those are only three I know.
And.
But those are all three big projects.
Okay, and then maybe just.
Another one just on wages.
A lot of the data we track it seems to have stabilized, but that's still seems to be growing at a healthy pace.
Just curious if you could comment on what you're seeing on that front, how you feel about the investments we've made over the last year or two on delivery in warehouse personnel, but also how youre.
Your core restaurant customers are dealing with and.
Dealing with labor and and turnover and how that's impacting their business and I guess in turn.
Your business.
Kelly as Jim I'll take the first half about our labor and I think George will take the second of customers but.
As you recall, a almost two years ago, we really did a very important and good job of making sure we had our driver and warehouse wages, where they needed to be in representing the marketplace.
And since then I think we've we've found our sweet spot.
From a labor cost perspective, I don't expect anything unusual coming forward other than the typical standard.
Approach and I think where we're in a good place from a labor wage rate management standpoint.
That's that's a wed look at it George will address the second at the customers is something I ask everyone on my talk too because I think they're getting hit both ways and Thats where.
We're dealing with more inflation than there used to.
In the product and of course, we all know how difficult the wage part of it is and I just simply asking what is the biggest problem of the two right now and the answer is almost always wages.
And I think it.
When we get passed this is probably good for the industry because today the.
Theres decent sales growth in the restaurant industry, but certainly isn't traffic growth.
And I think that people are.
Our customers are very smart around how to get menu price increases.
Without it just being a blatant these across the board menu price increases, which seem to work very well, but when they've got both of those things to overcome I think it's difficult.
And.
I think we're dealing on a higher end of the wage scale than they are.
And we made our adjustments fairly aggressively when we needed to.
I think it's much harder for our customers today, Unfortunately that is for us.
Thank you.
Our next question comes from the line of Chris Mandeville of Jefferies.
Hey, good morning.
Jim the call it 2% to 3% EBITDA Guide X Reinhart is there any ability to further break that down in terms of the drivers of the increase and then.
If I recall correctly, we spoke about this last quarter, but I'm pretty certain you guys had a third cigarette price increase in this current quarter. So thats. The case can you break that out in terms of contribution as well.
Yes on the second half of your question, we did not see a cigarette price increase in the.
Don't really know frankly, how to expect order to expect one, but we don't effect of that in.
And Chris Thanks for the question, but the guidance we provided in the prepared remarks is really the.
The level of detail that we're going to provide.
Okay, that's fair.
And then I guess my follow up would be just with respect to fuel surcharges in cost.
As pricing has come down pretty considerably lately can you just remind us that maybe if that the timing of impact certainly gross profit versus opex and what percentage of your neither are currently has down.
Yes.
Look I'll tell you, we we work to do some hedging and it's it's certainly not material.
We think we do a pretty good job of staying on top of the prices and staying in front of it and to some degree there's a cost of doing business involved in diesel pricing.
Well I just I don't see it is something that.
As a material effect on on the results in the fuel surcharges were we manage those very closely and very strictly in the us.
I think that that's not an important part of how we manage our business and our piano, it's more about making sure we have the right price to our customer and.
All of Thats.
Surcharge goes into.
Margins, so it can be a little bit deceptive when that goes away.
Internally, we always look at as an offset to fuel prices. So.
Okay. Thanks, guys.
Your next question comes from the line up to the Frommer of credit Suisse.
Hi, Thanks for taking the questions.
Maybe first just kind of housekeeping item Jim.
The earnings accretion from the deal change at all with the new definition vps backing out the amortization or kind of there.
The impacts you gave for the first couple of years are the same.
Yes look as good.
Just as you know we're just a month following the close the transaction. So far we mentioned integrations going well, we should do feel good about the deal very good about the deal.
We gave you some color on our expectations for 2020, including Reinhart for the two full fiscal quarters and next year, we'll do the same for 2021 to help you with your model.
As you would expect things move around for all our businesses and we art actually going to provide an update on the accretion math, but will focus on our current fiscal year metrics and results in of course provide an update on how synergy capture is progressing.
Okay, and so maybe just dovetailing on the synergies George can you help us with obviously the 50 million run rate is cost synergy.
Just kind of kind of general timeline to get AD revenue synergies, maybe specifically private label or anything else along those lines.
Well I think it'll it's one of those things that will just build.
With that with some work to do to get them in a position to grow the way we would like to see them grow I think it'll probably take us a couple of quarters to to start to ramp that up I think it'll be pretty consistent enter a couple of years.
Like I said, it's a very well run company is just a matter of getting a little bit different type of sales culture.
Got it thanks.
Once again, if you'd like to ask your question. Please press Star One. Your next question comes from the line of Jeffrey Bernstein of Barclays.
Great. Thank you very much.
George I think in your prepared remarks, you said.
Restaurant health remains strong.
Just wondering if you can maybe contextualize that for us I know.
Industry people talk about lack luster comp growth you mentioned the challenge from a traffic perspective and significant cost inflation, both labor as you mentioned and commodities Im just wondering.
How do you think about the health of the industry and then maybe you're talking about changeovers independents or QSR is versus casual dining just trying to assess your view of the restaurant industry in that context.
I think casual dining is still struggling but.
Like you would expect there are some out there doing well and people can do well.
Still in that business. The reason I think the industry strong as they've done a lot of headwinds to go against particularly what we talked about there's some inflation.
And there are certainly wage inflation.
And yet the industry is continuing to find a way to grow their top line and a way to keep traffic pretty steady and I think those are good accomplishments.
I think it bodes well for the future of the business.
Okay and then.
Jim from a commodity standpoint.
You guys mentioned inflation of about 3% in the second quarter modestly from the first quarter and now I guess.
Very top end of the 2% to 3% comfort range you talked about in terms of being able to pass along to customers. Just wondering whether you think that.
This level of NAV from plus we're going to hold steady or you think of the past two quarters is relatively steady or maybe you think we're at the start of an upward trend and they talked about dairy and meat and others have talked about the same thing. So would you expect inflation to continue to creep higher outside of that two or 3% range.
Well look I don't have a crystal ball I don't think any of us do and.
Look 3% is certainly we're very comfortable passing it through as you can see with our margins and the margin results frankly, we can we can pass through in any range between and up to 4% I think we can make that work.
I'm not too concerned about it but we're definitely going to keep our eye on it we won't underestimated and we keep our salesforce very in tune with what's going on in the commodities market.
Understood. Thank you.
Your next question comes from the line of Marisa Sullivan of Bank of America Securities.
Hi, Thanks for taking the question.
Just wanted to touch on the the Reinhart acquisition and comments you made previously about filling.
Sales.
Growth culture.
Reinhart can you just talked about what you've done I guess, the last few weeks and kind of what's what are your priorities for the rest of this fiscal year.
Well, we spend our time talking to people in learning.
There's certainly some excellent salespeople there.
And they just havent had a.
I guess I would say a system in place that.
That put a high priority on growth.
They.
The last several years of basically been kind of the same the same type of sales. The same type of earnings and I think it's you just have to change a culture, a little bit but the people are very willing we have mall here right now.
And.
A lot of them are people that we've worked with in the past.
And.
We're just confident that as we get.
Some product changes not anything or shattering.
A little different approach to to the marketplace and.
At some more people on board I think we'll be in good shape.
Got it and then if I could just.
Follow up on on independent case growth.
Can you just parse out a little bit where you saw the growth coming from this quarter and any changes.
In terms of penetration or.
New customer wins and.
Yes, any additional color great. Thanks, yeah.
I would say for us it's it's more about new customers than anything that's normal that's probably most people in our industry you got a fairly high.
Turnover in restaurants.
We're certainly not penetrating those wells, we would like to see but when traffic is flat.
And you are penetrating I guess, you can look at that as an accomplishment, but for us. The biggest thing that we seem to be able to continue to improve is just the loss of business continues to go down it's not huge quarter to quarter, but over time, it's gone down significantly.
Thank you.
Thank you at this time Im showing no further questions I'll now turn the call to Bill Marshall for any closing comments.
Thank you for joining our call today, if you have any follow up questions. Please contact us and Investor Relations.
Thank you for participating NPF Tiv fiscal year Q2, Twentytwenty earnings Conference call. You May now disconnect your lines and have a wonderful day.
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