Q3 2022 Performance Food Group Co Earnings Call
It is already producing results as new business wins in convenience <unk> foodservice and Vista are being achieved with the breadth and depth of products and services. Our company can offer a range of customers. Each of our companies has worked hard to expand our addressable market, while maintaining our commitment to existing lines of business.
The result is a powerful story of organic success.
<unk> was strategic expansion into new lines of business to drive long term sales and adjusted EBITDA growth.
As you can see from our fiscal third quarter results, we have solid momentum along this path posting net sales at the top end of our guidance range and higher than anticipated adjusted EBITA margins topline results in April have been consistently strong.
This has allowed us to increase our outlook for the full year and we now believe $1 billion of adjusted EBITDA as possible for fiscal 2022, even with just 10 months of <unk> results.
This morning, I will discuss a few notable areas that drove the success and then Jim will add some financial color, we will close by taking your questions.
Starting with our foodservice segment strong sales and EBITDA growth was led by independent case growth total independent organic cases were up 13, 7% in the quarter as we continue to win business.
That in the quarter, we added approximately 4500, new independent accounts and the number of active independent accounts increased by double digit percentage compared to the third quarter of last year.
This was a significant acceleration from the second quarter. We also saw record levels of performance brand penetration within independents. Another important driver of margin expansion and EBITDA growth for our broad line business, our differentiated high quality brands continue to provide great growth as restaurant operators to provide <unk>.
<unk> to consumers, particularly during the time of high inflation.
We began to integrate merchants, which we acquired at the very end of the calendar year, while merchants will take a few quarters to build to a full run rate of EBITDA contribution. We're very pleased with the early integration progress and believe this will prove to be another excellent acquisition for our company.
Before moving onto our convenience segment I want to speak to the inflation situation.
As you know inflation has been persistent throughout the fiscal year and accelerated in the third quarter.
Fact, our foodservice segment experienced nearly 20% food cost inflation in the quarter chicken sequentially higher compared to the prior two quarters.
We are encouraged by the fact that we've been able to pass along these higher costs.
Does not seem to resulting in significant demand destruction.
Consumers appear willing to accept the higher menu prices, particularly as inflation is broad and not disproportionately impacting food away from home.
Still this is something to closely monitor across the next few months and quarters.
Moving on to our convenience segment.
When we closed the core Mark transaction, we had high expectations and expect a quick progress not only on integration, but for our new business opportunities.
I am very pleased to say that our expectations have been met and even exceeded in many ways. You can see this play out in our sales and EBITDA progress for the convenience segment.
We described a few instances of new wins and the convenience arena, we have begun to ship to these new accounts and early progress is encouraging.
Also excited at the new opportunities arise regularly.
With a strong pipeline of new business that we expect to add over the coming quarters and years.
As our pipeline of new business grows we expect to see margins in the convenience segment improve there are many factors underpinning this improvement.
Including early synergy capture and tight cost control management, but there are also healthy signs of growth in the food and foodservice area within convenience.
As one enterprise PFG can provide products and services that we believe will make us a preferred supplier to the convenience operator.
Our ability to provide expanded food product selection and cost efficiencies along with our expertise in the fluid space. Our few of our many strategic advantages.
We strongly believe that our <unk> platform gives us a leg up compared to the competition and the convenience arena.
Okay.
To provide insight into our convenience store strategy, we are providing additional information showcasing sales progress to achieve this we have identified two distinct buckets of products that we sell into the C store channel through core Mark Eby Brown and foodservice businesses. The first bucket is food foodservice.
<unk> and related products and the second is nicotine products.
Definition of food foodservice and related products includes all fresh foods and packaged goods, including candy snacks beverages.
Coffee as well as any food related packaging or equipment.
Essentially these products reflect everything we saw the campaign with customers, excluding all tobacco products.
These sales may be captured within the convenience segment or within the foodservice segment, depending on which operating company makes the delivery.
The second category of nicotine products encompasses our cigarettes.
Smokeless day, oral nicotine and other tobacco related products.
Only our convenience operating companies delivered tobacco products.
We have discussed in the past our focus is growing the food foodservice related product categories into convenience.
Which we believe will be a significant driver of sales profit and shareholder value divide derived from the core Mark transaction.
In the fiscal third quarter net sales from food foodservice and related products increased approximately 21, 5%.
This is compared to a one 9% decline in all nicotine product sales.
Produced a positive product mix for PFG.
As you can tell we are extremely pleased with the quick progress we have made and convenient space.
Not be possible without a smooth integration process, which has continued to track on or in some cases ahead of expectations.
We're excited to share a deeper look into our convenience strategy at the core Mark headquarters in late June .
This will be.
An opportunity for the investment community to engage with our leadership across the organization and see the strong collaboration we have fostered among all of our segments.
Finally, a few words on our <unk> business, which has made significant strides over the past several quarters and is well on its way towards a full recovery.
Over the past several quarters, we have discussed how discharge recovery would likely be slower than the rest of our business due to exposure to the hardest hit channels we serve.
While that has largely played out we are encouraged by the recent progress, particularly in the theater business.
We're also optimistic that a slow return to work trend could provide a tailwind to our office coffee business in the months ahead.
With that said the office landscape will likely look different in the future and we need to adapt to the new structure of the work environment.
As markets continue to improve the inflationary environment has also helped to start achieved sales and profit growth in fact for the last two quarters. The starts EBITA margin has held steady at approximately in line with peak pre pandemic levels.
There are also a number of exciting growth opportunities at <unk>, including the retail automation network, we have highlighted in the past.
Operations at our three facilities are fully open and continue to bring on new customers.
We're pleased to report that in recent months each of the facilities has achieved mid to high single digit EBITDA margins our rate of profit improvement that is outpacing our original expectations.
We believe this bodes extremely well for the long term potential of this initiative.
Our long term outlook for <unk> is very positive as legacy channels is showing a clear path to recovery and new lines of business were nicely, adding to our sales and profit growth.
Before turning it over to Jim I wanted to touch on our ESG program.
Which has been an important initiative for our organization during the fiscal third quarter, We published our second annual ESG report and for the first time set long term goals for our company. This included objectives to reduce power consumption intensity by 20% increase the diversion rate for operational waste.
By 80% and.
And increased purchases with women.
Veteran and minority owned businesses by 25%.
By the year 2030.
Furthermore, in April we announced the introduction of 10 net zero emission refrigerated trailers to our fleet at our Gilroy, California distribution Center.
Steps like this are important progress in our company's ongoing journey towards being an ESG leader in our industry.
To summarize all three of our operating segments have made significant progress over the past three months and maintained strong momentum into the spring and summer we have manage the labor market, well, which has helped our margin profile and east some supply chain challenges, which has allowed us to improve our service levels to customers.
Our independent restaurant business posted double digit organic case growth increasing market share and driving profit growth.
Convenience business has exceeded our high expectations with a smooth integration and steady business wins and Vista has shown steady improvement and is generating high margins, which should continue to be a tailwind to our earnings growth going forward.
I would now like to turn it over to Jim who will review, our financial position and earnings results in more detail Jim.
Thank you George and good morning, everyone.
As George discussed earlier, our business results have continued to improve which continues to solidify our financial position. This.
This morning, I would like to discuss our cash flow and balance sheet positioning before turning to a brief overview of our business results.
And discussion of the operating environment.
I'll finish with our updated guidance and then we'll be happy to take your questions.
<unk> experienced strong operating cash flow and free cash flow in the fiscal third quarter and the first nine months operating cash flow over the first nine months of the fiscal year was about $391 million as we generated.
Approximately $237 million.
Of operating cash flow in the fiscal third quarter.
Improvements in working capital added to our strong underlying profit performance.
Our free cash flow, which we define as cash generated from operations less capex was about $250 million over the first nine months, there was about $165 million in the fiscal third quarter.
We used additional cash flow to pay down our ABL and closed the quarter with approximately $4 2 billion of total debt, including finance lease exposure at a weighted average interest expense of three 9%.
Total company leverage is now four two times, our trailing 12 month, adjusted EBITDA, including core Mark for the entire period.
We are committed to paying down our debt and the absence of strategic M&A opportunities.
Our total liquidity position remains strong at $2 $4 billion, we believe that our liquidity provides plenty of flexibility to invest in the business attractive financing levels.
With that let's quickly review some highlights from our fiscal third quarter business performance.
As a reminder, last quarter, we increased our reporting segments from two to three now reporting on foodservice convenience and westar.
At a total PFG enterprise level net sales increased 82% in the quarter to $13 1 billion driven by the addition of core Mark inflation.
The continued recovery in the business environment.
Total case volume increased 35, 3% in the third quarter and was up eight 3%, excluding the contribution from core Mark and merchants.
Organic independent cases increased 13, 7% in the fiscal third quarter as we continue to see solid momentum in our independent business.
Total <unk> gross profit increased 61, 6% compared to the prior year quarter, including the addition of the core Mark business and the independent case growth, which I just mentioned.
<unk> contributed $243 million in gross profit during the fiscal third quarter.
Food cost inflation continued to move higher in the quarter, our weighted cost inflation was 13, 6% up sequentially as we continue to experience double digit increase in our foodservice commodities foodservice segment food cost inflation approach, 20% in the fiscal third quarter.
We have continued to successfully pass along these increases.
Gross profit per case was up about $1 in the third quarter compared to the prior year period.
We continue to make progress from a labor front and our efforts to reduce temporary and contract workers as.
As we disclosed in the press release this morning, our temporary contract labor costs increased $16 million compared to the prior year period.
Which includes both direct contract labor costs and associated travel costs.
This was another sequential step down compared to the prior quarter when contract labor costs were up $34 million over the prior year.
As we've discussed through the year, we will not see the full benefit of those cost reductions immediately as a reduction in temporary workers has largely replaced by full time associates.
However over time, we should realize savings from these initiatives as full time worker productivity increases.
We are pleased to see consistent improvement in the labor situation to date, though we.
We expect the pace of lower temporary labor costs to begin to flatten as we reach a steady state of operations.
In the third quarter PMT reported net income of $23 4 million.
Adjusted EBITDA increased 96, 3% to $237 9 million.
Diluted earnings per share was about <unk> in the third quarter, while adjusted diluted earnings per share was <unk> 51.
Our EPS results were impacted by a higher tax rate compared to the second quarter, mostly due to a decrease in deductible discrete items related to stock based compensation.
Based on our strong third quarter results and positive outlook for the fourth quarter today, we adjusted our full year guidance.
We are raising the bottom end of our full year sales guidance by $500 million and now look for total net sales to be in a 55% to $51 billion range.
For adjusted EBITDA, we are raising the top and bottom end of the range and now anticipate $990 million to $1 billion or $20 million increase on the bottom end.
$10 million increase on the top end compared to our prior guidance.
In summary, we're extremely pleased with our quarterly and year to date financial results.
We posted a strong quarter and we expect the momentum to continue in the fourth quarter.
This is reflected in a better outlook for our full year guidance, particularly on adjusted EBITDA, showing our strong commitment to margin improvement.
Our company is positioned to build on our strength driven by our consistent focus on our existing customer base, while adding high profit new accounts across channels.
The core Mark integration has proceeded very well, both culturally and from a business perspective our.
Our balance sheet remains strong providing flexibility to invest in value, creating projects to drive organic growth.
We believe these factors will allow us to achieve our three main objectives sustained profitable sales growth EBITDA margin expansion and debt Paydown.
We appreciate your interest in performance food group and with that we'd be happy to take your questions.
At this time, if you go back to ask a question. Please press star one on your telephone keypad to remove yourself from the queue press the pound key once upon that are starting to ask the question and we will take our first question from Alex <unk> with Jefferies.
Hi, good morning. Thanks.
On the guide and of that the recent convenience foodservice sales trend of our non cigarette categories and looks like it was very strong in the quarter overall.
I'm curious.
How they're impacted by the higher fuel costs. If you have any more recent observations about the C store operators are responding that.
Perhaps any changing consumer habits with the elevated gas prices.
The convenience rollout.
Yes. This is George.
Typically.
Where people with experience that are in the convenience business is when fuel is high it tends to have.
The negative impact point of consumption or the purchases of nicotine products, but not so much the other items.
Many people when they go to fuel.
To get fuel they don't fill their tanks filled in there by $20 or $30.
They have their number of fuel.
And they tend to then go to convenience stores more frequently and that frequency tends to help them.
Some of the food areas, particularly the <unk>.
Having repriced areas.
Interesting okay.
And then just on inflation in calling out that there is.
Do you see anything into the fiscal fourth corner or any pockets of sequential softening on on inflation.
Just an idea of what you are baking into your expectations.
Our sales estimate.
Yes. This is Jim overall, we expect a new plan for continued inflation in our organization is prepared to handle it.
We believe we've we've done a very good job that our team across across the organization has done a very good job managing through inflation. So we think we'll continue to see it at the product level and we will continue to see it at the.
At the operating cost level.
Something similar to what we've seen in Q3, though there may be signs that we could see shortly.
Turning to abate, but I don't think that that will be material.
Got it thank you.
We'll take our next question from Jake Bartlett with <unk> Securities. Your line is open.
Great. Thanks for taking my questions. My first one is just on the staffing situation and it's great to see.
Temporary labor coming out and those related costs.
Can you talk about how close you are now to Europe .
Critical to kind of normal levels with staffing is there maybe represent kind of that you have to improve too.
Gauge, how youre far how.
You are back to normal.
Yeah in general we are definitely trending towards being back to normal and we would expect that to occur towards the very end of Q4.
Insistent with what we had expected and hoped for when we started the fiscal year and talked about it in Q1 and first disclose that information.
Early on in the year so.
Our operators have done.
Exceptional job and.
Everyone in the supply chain.
And learning how to manage through this difficult time and now they've gotten that we're in a much better shape and the outlook.
That we have for the future and very upbeat on that.
We saw also starting to see slight improvements with overtime.
I want to be thoughtful in that comment our supply chain is still working very very hard it's not an easy time for them.
They are doing is impressive.
So we see that number coming down and we expect it to continue but as it gets closer to steady state, it's just not going to be able to improve as much.
As it has been the pace of improvement will moderate.
Great. Thanks, that's helpful. And then my next question was just on the chain business.
Maybe an update there I know as of last call Youre kind of running.
Behind the prior year and you mentioned that you had a long a large funnel of potential new business, but we are.
Just careful not to add cost at accounts until you had a better understanding of your cost structure I'm wondering how that looks today, whether you are potentially going to be more aggressive or in a position to be in terms of trying to get incremental chain business.
Well, we continue to have problems in some markets from a service level standpoint.
What has been really encouraging for us is that we see nice increase in our number of customers, where we get service levels back to.
Kind of pre Covid levels.
As far as the National account cargoes, you are still running and cases behind 2019, where last year, we did surpassed 2019 and independent.
And.
This year, we built on that increase from last year.
Where we're not in a position yet where.
We're going to be real aggressive to get that type of business.
Our day will come when our service levels are better.
Also we are in such a high inflationary period of time, and we've been able to hold pretty steady with margins because of the change in our mix of business as we continue to grow our independent faster and the convenience business.
We've continued to.
Grow the independent faster and also obviously huge difference between our areas of concentration in the food area versus nicotine.
And it comes to this star.
We have really have made great strides from a service standpoint.
Our margins and to help once again by mix as theater.
So it's a lower gross margin area as his office coffee driven a lot by just the total case price of the product.
So we feel real comfortable around our sales growth number right. Now April was exceptionally strong month for us. So I think that will continue along the path that we are when our service levels are really in place we have a great feel for what our cost of the business would be in the future.
<unk>.
We'll get more aggressive from a national account standpoint.
Great. Thank you very much.
Well take our next question from John John Harbaugh with Guggenheim. Your line is open.
So I wanted to start with the 22% increase.
C store food revenue.
Yes.
Our organic is that meeting sort of being helped by Rick still recovery from Covid and chunky new business.
What do you think is a good sustainable growth rate.
Longer term.
The high single digit is that doable.
And then first of all yes.
John first of all it's all organic from the standpoint that we have the pro forma.
Alright.
Core mark numbers in that previous year number yes.
I'm not real comfortable about if thats sustainable or not.
Obviously, we've got some some good early wins I don't see any reason why we can't continue to get some some good wins, but I think we're probably a few quarters away from being able to give any guidance as to what is sustainable.
In that food area.
Focus the fourth being <unk> stores, probably the biggest focus for them inside the box one of the biggest focuses as prepared food.
Some of them do a good job.
So when you think about your ability to.
<unk> expertise.
And actually begin to impact their business.
How long do you think that that will take right in terms of product development.
You are marketing your capabilities.
I think we've already done a good job as far as product development goes we certainly have some voids we've learned a lot.
It is it is a different foodservice market.
And then a restaurant.
Actually some of our early wins on these turnkey type programs, where more foodservice customers and ghost kitchens and places like that but we've learned a lot I think we are ready to go there I think it comes down to our ability to market the product and <unk>.
Making these decisions would seem to be different for every account no surprise as to where we deliver that product from but I think our offering is more important our level of competitiveness the quality of it than where we deliver it from.
We're learning as we go along and Thats part of why we're so encouraged because we are learning a lot.
We're making a mistake here and there and yet we're doing very well.
Alright, and then just lastly, you're not yet seeing any impact on demand from inflation.
You've done this a long time George.
Anthony any thoughts.
When that might materialize and I know the pizza Italian business held up really well.
Covid for a lot of reasons is there anything youre seeing that would suggest people may be shifting from higher cost higher cost.
Dining out to lower cost or not yet.
I have not seen that yet.
Needless to say frequent dine out person and I'm I'm seeing the higher end and steakhouses appeared to be doing really well.
Pizza.
We were.
We were certainly down from a growth standpoint, this last quarter from where we had been.
I was starting to bump a little bit of concern with it we'd still high single digits.
Case growth, but then I looked at the big three when they put their numbers out the big three pizza chains.
And they were somewhere between 6% negative and one 9% positive from a same store sales standpoint.
Then.
We get some limited reporting on sure.
It doesn't include a lot of the specialty guys. So maybe it's not.
As accurate as in some other parts of the business, but our share gains are actually better than they had been in the past at lower growth. So that does show me theres, a little bit of pizza fatigue out there there are a lot of other options for people dining out.
But we just have not seen any demand destruction and then you made the comment I had been added a long time and I have.
Never quite seen this type of situation.
I do have a little bit of a concern that menu price increases have not caught up with what our customers have experienced from price increases.
Got it.
It just doesn't seem like anything really.
Merely impacts.
The consumer today.
Matter of fact, I would go so far Jon is to say the bigger issue, we have right now of staffing at the restaurant level.
Sure.
Just don't take enough reservations fulfill the restaurant because of their concern about being able to service the customer.
Okay.
Okay.
Thank you.
Thanks Sarah.
We'll take our next question from Edward Kelly with Wells Fargo. Your line is open.
Hi, guys good morning.
George you mentioned.
And exceptionally strong April I was hoping could you provide just a bit more.
Color on what Youre seeing currently including maybe some detail on.
Customer type and is there a way to frame it from like a number standpoint, I mean are you now running above 2019, and total organic case volume.
And then just thoughts on bonds sort of like early may and into the summer I mean, it does seem like there is some reason for optimism is things like travel pickup.
Yes, I'll give you some high level, we don't we don't want to start giving.
Current numbers, it's probably not the right thing for us to do.
We just saw sequentially things got better in the third quarter.
Particularly when you take into account just channel differences.
And.
Just change in mix of business.
Each area of our business improved and we've seen that continue into the month of April .
<unk> had a couple of record weeks foodservice, we've been having record sales weeks so.
We're very encouraged.
Okay, and then a follow up I guess probably for Tim.
Tim you mentioned.
Some of the temporary costs.
Over $100 million this year sort of rolling off.
But you do have new hires coming in Paris overtime should improve I mean, the opex situation is kind of complicated.
But as we look out into fiscal 'twenty three.
Is there a way you can sort of help us all sort of frame that.
I assume you don't want to just taken off.
Opex down by the temporary costs it sounds like.
What happens from like an Opex per case perspective.
How do we think about that in 'twenty three given all the puts and takes.
Yes.
Thanks for the question certainly not in a position to give opex guidance for 2023, we need to have a lot more information about the business at our upcoming Investor day.
In late June , but I think there are some things to think about.
If you remember labor is by far the majority of our Opex labor has been one of the largest pressure points, obviously that we felt across the last probably two years and now we're starting to see trends improve both 10.
10 flavor as we've reported on.
As well as I've mentioned over time, beginning to improve and as those two things get better just the natural progression of the supply chain starts to improve it becomes more efficient more accurate we will see less mistakes, we will see less damage and safety will improve so.
It's a very good question I think I'll leave my answer at that and really look forward to talking to everyone at Investor day.
Okay, great. Thanks, guys.
Thanks.
Well take our next question from Mark Carden with UBS. Your line is open.
Good morning, Thanks, a lot for taking my questions. So to start just in terms of the recovery in some of the harder hit cobot market are you still trending much below your historical volumes.
And then how much of a leg to growth could this potentially be a sale.
But I would tell you I look close every week.
Pat.
How many cases for shipping out of each of the Opco versus 2019, the best comparison that we can kind of grab.
And.
Many of our companies past that last year.
The ones that didn't tended to be a good bit behind those levels.
That's where we're really improving as you would expect that that versus last year at the fastest rate as those markets that were really late to recover.
And most of those markets have now surpassed 2019 for independence.
Case growth and when I say most its.
If there's two or three that didn't for the week that's typically.
A lot so.
We feel like we're there it's widespread.
And great to see.
Great and then with the higher fuel prices how much protection do you guys have in place throughout the surcharges in your hedges and then how does this compare across your different business units.
Convenience treated any differently. Thanks.
Yes, I'll ask I'll answer in the convenience and I'm going to turn it over to Jim.
We're really looking at best practices very closely.
Core mark versus <unk>, and how they approach the marketplace.
And the leaders of those two businesses have worked extremely well together as we expected to see.
And they have found kind of some common ground on what to put in place a fuel surcharge.
So we've made some great improvements in the convenience area as far as two.
How much.
Increase in fuel that we can capture we've always done a good job in the other areas and I'll, let Jim comment on that.
So any distributor fueled a meaningful piece of the operating expense and we have two ways that we mitigate increases in fuel prices. The first is the fuel surcharge program.
Included in customer contracts covers about at about two thirds of our fuel consumption.
That allows us to pass along price increases to consumers relatively quickly and fairly.
The other is our fuel color program and that covers about a third of our fuel consumption and provides protection from spikes in fuel prices. We will have some exposure up until the cap on the collar, but we're protected.
The high end of the collar and we're starting to clearly starting to see the benefit.
From those fuel colors that we put into place. So we're really happy with <unk>.
That's protected us somewhat so with both of these programs in place we can mitigate a good portion.
The upward move in fuel prices and there is a little bit of a lag.
We've mentioned that before and I'll, let some in the past.
Makes sense. Thanks, so much good luck guys.
Thanks.
We will take our next question from John Glass with Morgan Stanley . Your line is open.
Thanks very much my question is on your food service supply chain first what gives full rates look like now are you still sort of down versus prior.
So talk a little bit about more inflation rate maybe versus repairs everyone's running hot news seems to be higher than others. In the foodservice business is there is there a specific reason for that maybe saw inflation later, maybe it's the mix of products than we.
What are you doing with your vendors to maybe help mitigate that inflation.
Anything can be done.
I'm sorry could you ask that first question again, it broke up a little bit.
On inflation, yes.
The first one is simply on your full rates to your customers. How is your supply from your vendors gone such that your what is your fill a two year existing customers in the in the foodservice business place. Yes, we are seeing constant improvement in our inbound fill rates from our suppliers.
And I think that the supply chain is kind of getting back on its feet again, and we're typically in about that 95% range inbound. So we're real pleased there.
Add that in our <unk> world in our convenience world that is not the case that it's still running in the seventy's and much more difficult.
As far as our inflation difference maybe versus <unk>.
People that we compete in parts of our business.
When it comes to food service I think that part of it is we have real outsized percentage of our business is in poultry, we supply a lot of the.
Large.
Chains in the country that are heavier all chicken.
We also do exceptionally well in our independent business.
In poultry and that has had much higher rates.
Rates of inflation price, we sell a lot of flower and we sell a lot of bill balls, we sell a lot of.
Pizza crust.
That said.
Outsized.
Factor in Us and I would say just center of the plate.
In general were.
We're growing faster in that area of our business and we are other areas of our business.
And that's that's really having an impact on our inflation rates.
Thank you.
Your largest competitor is making a big push into independent restaurants, particularly certain cuisines, where <unk> historically had strong market share.
Are they starting to show up more often as a competitor or are you seeing that.
With that it's a huge market actually.
Our competitive set is.
Has always been.
They are big and they are strong and they are tough and.
They always have been and I would imagine they always will be.
Yeah.
Thank you.
We will take time.
Hi, good morning, and thanks for taking our questions.
Just wanted to ask about just okay.
Our synergies here, we have mapped out youre kind of pro forma earnings power with core.
Brian .
Is it your synergies you expected at about $1 billion.
And Youre, basically, saying youre going to be there. This year. So I guess just a question is can you update us on where you are with those synergies.
Outlined originally how much you think it will be.
Kind of in the run rate by the end of this year and how much is left for future years.
Well I'm going to comment on on what we're doing there and then I'll turn it over to Jim to give some maybe some high level numbers.
We've progressed from a synergy standpoint, much faster with.
With core Mark in <unk> than we have with Reinhart.
And the biggest reason for that is the businesses are very similar the SKU base is very similar.
Okay.
The structure.
Different.
But as I mentioned earlier, the two leaders of those two businesses have had just done a great job of.
Lining things up such that in some areas.
We've kind of approached the business the way EBITDA in some areas we've approached the business the way that core market, but theyre very similar businesses and we've been able to make some quick progress there on.
On the Reinhart front, the SKU base is very different.
We have synergies that we're probably.
At least a year, maybe two years away from even.
Making the moves to get those synergies.
<unk> being our SKU base is very different number one number two we overlap a great deal.
<unk>.
Getting.
Getting ground broken getting permitting and getting a new warehouse built is a very long process. So we don't want to give up any capacity at offices additional expense from from a just distribution costs.
When you do that.
But the Reinhart business has improved so much.
So quick.
Their growth is running at such a great rate right now, but just any reason to go in and really disrupt the business and I think when you get good growth in earnings because of the performance of the business.
I think that is more important than trying to.
Grabbed synergies at any quicker rate.
Then the business itself can handle it and I think right now.
Just no reason to disrupt.
We've done a great job of getting the synergies that we feel were appropriate to get but I think.
The synergies and the reinhart's performance foodservice combination or continue to benefit this company for two three years in the future.
Jim.
Yes, I think Georgia is answering was actually right on and I'll only add a little bit of color because I thought the answer was.
It.
Exactly the way it needs to be described.
I'll speak to both Reinhart and core Mark at the same time.
Reinhart organization that we acquired and brought over and the core Mark organization leadership team et cetera that we brought over.
Because both of those groups are working so well with our existing organization.
That the integration work is right on track to probably a little ahead of schedule in both.
Gone really well very pleased to see integration, especially back office integration do so well.
And from a synergy perspective from a financial synergy perspective, we're right on track with our expectations and what we had talked about for both of those.
Okay, that's very very helpful.
I'll just.
Just maybe to follow up.
I think maybe Jim It was you that made the comment.
And then about being committed to paying down debt.
And then some strategic opportunities and.
Maybe just.
Help us understand where you're headed.
Does that in terms of.
Additional strategic opportunities do you have enough on your plate with.
With core and Brian Howard I mean, it sounds like that's going well, but what are you seeing out there.
Are you actively.
Yes, so first regarding to what's on our plate.
Let me be really clear with this we have a.
Very strong and robust balance sheet, our liquidity is exceptionally strong and we're really pleased with the financial one.
Ability that we have from that perspective. So we are in very good shape from <unk>.
From a balance sheet perspective from a bandwidth perspective.
The core Mark and performance food group team, which is now one team.
As I mentioned <unk> done a very good job with integration Thats on its path and I think from a bandwidth perspective on the convenience side of the business.
We're starting to develop additional bandwidth and so things are freeing up there on the fraud line, our foodservice side of the business.
Weighted into foodservice, so we have integration bandwidth there as well.
So.
We have <unk>.
Liquidity financial capacity and the.
The strength to integrate.
Great another acquisition that.
That leaves us with acquisition opportunities or strategic opportunities.
We will be very.
Selective and strategic in what we would target.
And at this point at this moment in time, I don't see that opportunity presenting itself, but.
I think I'll ask George to comment on further M&A. Yes. We are we are always going to be operating as opportunistic and if something came along.
That really right valuation.
But right now.
We're pretty serious about paying down debt now we've done that.
Aggregate.
That used to have day to day run a risk.
So our business is very experienced.
M&A area and he's got a heavy concentration on that right now and he tends to get things done so.
I think youll see us do some things, but theyre not going to be real large.
They're not going to be.
Far from what we are good at and what we feel is our future.
And the <unk> business.
We mentioned the three.
Retail automated facilities that we have and we would like to have more of those and we'd like to have more capability there.
And at this point we've done.
That we would like to get better at and I think we will be.
Yeah.
By coming to our investors.
Today as to as to where we're headed with with our different businesses.
<unk>.
Please your line is open.
Thank you for the question.
Passing through inflation, what are you watching to see whether you might decide to delay pushing for inflation.
Cognizant really cognizant.
Inflation is doing on our customer.
And.
Deal of our abilities.
We need to keep our margins.
Comparable to where they were before that.
Just crazy inflation is a change in our mix of business and you were just really focused on the parts of our business, where we have more to bring the customer and we tend to be able to get a higher margin.
Trying.
To make sure that we.
Jim levels in our foodservice business, where you're running close to 20% inflation.
We still have product areas.
But we price on a cents per pound.
Obviously, you need to get a little bit more when <unk> got.
A lot of inflation, but we've done a great job and our gross profit per case, I think the industry, probably as a whole has done a great job there.
But we're their customer.
Six two much inflation and we don't want to see.
Any disruption to demand I talked about earlier, we just don't see it.
Remarkable that we just really have indication.
Sure.
Okay.
We have less inflation in our convenience and our desktop business.
We have.
Sizable business with values.
Stores were.
They tend to.
Do well.
So far.
It's going to slow down demand.
<unk> add to that.
I agree and we are managing inflows.
<unk> been for a while and I would expect.
Just to manage it appropriately going forward at the same time.
We are intentionally focusing on.
Growing cases.
At our most profitable lines of business, including independent restaurants.
In foodservice and convenience as George mentioned earlier and high margin vis star channels that just.
Our business is very new to result in top line margins.
Margins and drive shareholder value.
Can we understand it we believe we know how.
The management will continue.
Great.
Okay. Thank you for that.
Independent case growth can you just talk about the composition of gross in terms of the magnitude coming from now.
No customer acquisition versus wallet share, whether that's more balanced this quarter.
Our penetration in existing accounts have been account that we sold this year than we sold last year continues to run at the highest levels ever run that and I think that.
Part of that is there are you.
Staffed properly youre going to be doing significantly more.
More business than the previous year.
Because that has waned some.
Particularly in our pizza channel because they.
They were.
We were less options a year ago, and they were doing exceptionally well thats why im. So pleased that we were still high single digit case growth was very very pleasing.
And based on our levels of service that we've had in the markets as I mentioned earlier I'm very encouraged.
Where we are staffed properly and we are growing well into double digit or number of new accounts over the previous year.
We believe that in the future quarters, it's the new business, that's going to drive our growth much more so than further penetration within existing accounts.
Great. Thank you guys so much.
We will take our next.
The next question from Andrew Wolf with C. L. King Your line is open.
Hi can you hear me on this call.
Yes.
Okay, and then last question the 4500, new independent customers.
Is that I haven't.
I've heard that metric before could you kind of compare that to a pre COVID-19 period or.
Any kind of I mean is that a kind of a breakthrough number for you on I know you said, it's a little lumpy and based on your service levels.
Yes. It is it is a breakthrough number for us right now.
We're doing it really without it being very widespread so that's that's an encouraging one I think accounts that are starting to open back up.
With new ownership I think that probably is helping us as well, but I think the bulk of that is by going out and selling in existing restaurants that we haven't sold before.
And is there anything in the market that's changed or is it are there less smaller competitors.
Or is it just more what <unk> is doing in terms of your own sales process change in the marketplace I guess the only.
The thing I would say is it seems like.
Our distributors have cut back on their geographic.
Traffic area.
So they may have gone to 150 miles to another metro market before and they arent now, but even thats not real widespread.
The marketplace is kind of is what it is.
And just a quick housekeeping, probably I think for Jim.
I think there was other income of a little over $11 million in the quarter was that related to holding gains at core mark or is there something else in there.
No thats the benefit from fuel hedges and derivative accounting, that's where that game goes when I talked about the fuel collars.
Yes.
We are very pleased and encouraged by the effectiveness of that program and it's been very helpful. And so the benefit is recorded in that alone.
Got it alright, thank you.
Okay.
We will take a follow up question from Edward Kelly with Wells Fargo. Your line is open.
Hey, guys. Thanks for taking.
And the follow up just a couple quick thanks Brad.
One on fuel.
Jamie just mentioned that the hedges are or sort of in other than the cost.
The rising fuel cost is actually kind of segment opex.
Okay.
So is the EBITDA I guess is kind of understate it because youre.
Including the offset there and then just overtime.
Do we think about the impact of higher fuel costs as kind of hedges roll off.
Well so.
The first one first comment I'm going to leave alone that was it.
Comment that was correct.
Following GAAP accounting under the Jacquette derivative accounting on the second part.
Yes, as we see fuel continues to go up.
Strategic and how we place.
Hedges and acquire callers and invest in those.
They're paid of course potentially be some erosion in the benefit.
Not projecting that right now.
We'll just have to manage that over time.
Okay, and then George just one quick follow up for you.
You had mentioned on.
The C store business and how.
Yes.
Sales are being allocated at either between the convenience segment or the foodservice segment.
Does this potentially kind of hurt the opex around how we look at foodservice sales, meaning like there could be foodservice sales that are now.
Okay.
Our convenience segment.
I'm just kind of wondering because I think people do look at those segments and just kind of curious as to if there is sort of like membership and around there.
Well the reason that we wanted to give the numbers out that way is just.
Number one we want to show the strength of our food business in convenience and number two we do expect the nicotine category to be.
One that erodes over time and.
We've always been a company that pride ourselves in our sales growth in that.
Portion of our business, we're not going to have that bet.
Sales growth.
What we're doing.
When we have an independent.
Convenience store.
And that shift.
<unk> foodservice that goes into independent sales for foodservice, but when we report the food part of our business for convenience.
Also be in there so that we can show what the growth is in that food category within convenience.
If it's a national account and we bring in.
The food program and it is done out of performance foodservice. It will show up in our national business in performance foodservice, but it will also show up in our food business within <unk>.
So Brian .
Get that okay, yes, yes that makes sense alright, thanks, guys.
Thanks.
For <unk>. Our next question from William Reuter with Bank of America.
Sure.
Your line is now open.
Hi, This is Mary on for Bill Thanks for taking my question.
Are you still targeting leverage in next year and a half to three times range.
Do you have any sense of when you make X net earnings.
So first yes.
Our sweet spot from a leverage perspective, we like to operate absent a large acquisition is two five to three clients.
We have not provided guidance on when we would achieve that however, we did.
Clearly say it.
We continue to believe that it's very important for us to pay down debt. We're very focused on that and we will continue to make sure that's in.
An important investment for us with our free cash flow is to pay down debt.
Got it that's helpful and I know you mentioned that accelerate for convenience and Jetstar remained challenge, but has there been any sequential improvement are you expecting any improvement there.
We have seen sequential improvement.
Slow.
And I will I don't want to get too complicated here, but.
Got.
It's kind of a hard number to figure because there are items.
Debt to suppliers have elected not to produce during this period of time.
And the customer is ordering them with every order that they put through.
So.
Our fill rates versus say the expectation of the customer.
That expectation.
Is.
What they are getting maybe better than what our fill rates show, but the improvement that we're seeing is very slow improvement.
If you think about it it's pretty logical I mean, our foodservice business and a lot of what we sell.
Center of the plate cheese.
They're basically one or two ingredient items so.
Wrong does that one or two items are available then they have the product.
When you get into our core Mark in just our business most of what we sell there hence.
Multiple ingredients, so theres multiple chances of that ingredient not be available.
So the bill rates are.
The availability is less and yet one of the thing I would add to that is <unk>.
Particularly going through the tougher comp periods.
When.
They couldn't fill demand from <unk>.
Retail in St. Pete.
CPG type supplier.
And they had.
15 flavors of an item they would take it down to five or six so they didn't have to change out the lines is often they could produce more product because they were selling everything they could produce.
And many of them today is still selling everything they can produce so.
They are just.
Not going to offer the type of variety and our customer will continue to order.
Those items that are not being produced today long answer, but I think that would give you a better understanding.
That's helpful. Thanks very much.
Well take our next question from Joshua long with Piper Sandler Your line is open.
Great. Thank you for taking the question I wanted to circle back to the inflation piece and maybe if you guys can talk about a couple of the tool sets or platforms.
<unk>, creating investments that you alluded to in terms of being able to manage.
Inflation, but also the pipeline value to your TRA.
To your end customers.
Within the context of the private label opportunity.
While our.
Our performance brands.
We continue and legacy.
Our performance companies to run in that little bit over 50% range and continues to grow of our business and I would tell you reinhart's improving like they are and everything they are improving at a faster rate than and I think that they will probably make it there as well and we do feel like that gives a better.
Value.
To our customer.
We will focus heavily on our brand, but we're also.
Conscious that something else has a better price value for our customer, we certainly don't mind selling that.
It fits it fits in with us real well.
We're not spending a lot of time trying to change what the customer does use.
Certainly.
They come to us and they werent something thats more competitive.
We will show them every offering that we have but for the most part where she was trying to be real consistent and encouraging the customer to to get a higher menu price as opposed to.
Affecting there.
The cost of goods.
Thank you.
Well take our last question from Jeffrey Bernstein with Barclays. Your line is open.
Great. Thank you very much.
I will follow up on the market share opportunity.
If we look back in three years.
Like the period post Covid would be.
Such a huge opportunity I'm just wondering if you could prioritize.
Where you think that would come from whether it's picking up new accounts or further penetrating existing accounts or.
M&A of smaller competitors or perhaps just closures of those competitors just kind of get a sense of whether you believe this would be.
Outsized period of market share gains and where you think of a way to prioritize that coming from.
Yes, our best market share gains at least from the information that we get.
We're the.
Several months after the first.
Shelter in place Kane.
And.
We're probably right now still a little bit better than we've done in the past, we haven't been able to get these numbers.
For a long time, but.
I think that new accounts is going to be there.
The biggest way in which we can gain share.
It's just such a big market for so many accounts and there are some of the accounts that we don't so I think it's just.
Assistant inevitability.
We're going to grow in that same kind of growth.
Got it and just on the inflation front like you mentioned.
While he is approaching 20% I'm just wondering.
I mean, how long is that sustainable you would think as you lap the difficult compares.
During the summer that naturally even without spot prices either you could see a significant pullback on that inflation level is that.
Fair to assume that we see.
Significant pullback in coming quarters or are there reasons to believe that spot prices are accelerating and therefore, we can be talking about 15% to 20% inflation even in the back half of calendar 'twenty two 'twenty three.
I feel like there's going to be less sequential inflation in there has been but I will tell you I've been feeling that for a while and it has happened.
It's been incredibly stubborn the inflation that we have.
Labor based.
Ingredient based.
And that's what we're seeing we're seeing definite improvement in the supply chain and some of those efficiencies I think led to a good bit of the inflation.
We do here.
Of late a lot of problems.
Has to do with the Ukraine.
One products were.
There are significant part of what the world consumes.
Yes.
Operator.
It's not huge.
Assortment of products.
I think that.
Could continue to go up but I guess I just had a feeling that sequentially we're going to.
To see less.
Understood and just lastly, the safe to say that labor you would say would follow the same trajectory.
Sorry.
Things getting better and maybe over time do you think turnover. These things should we assume in coming quarters.
Again, maybe it's taking longer than you would have expected, but that were easy.
And we are we're seeing.
<unk> do most of the markets not all but most of the markets with labor and I do think Thats a.
A big part of of the inflation.
We have no further questions on the line at this time I will turn the program back over to Bill Marshall.
Thank you for joining our call today do you have any follow up questions. Please contact us at Investor Relations.
This does.
Today's program. Thank you for your participation you may disconnect at any time.
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