Q1 2023 Performance Food Group Co Earnings Call
[music].
Good day and welcome to P. S. G fiscal year Q1, 2023 earnings conference call.
If you would like to ask a question at the conclusion of their prepared remarks. Please press the star key followed by the number one on your telephone keypad at anytime.
I would now like to turn the call over to Bill Marshall Vice President Investor Relations for PFG. Please go ahead Sir.
Thank you Shelby and good morning, we're here with George Holm, Pfg's CEO , Jim Hope Pfg's, CFO and Patrick catcher This star President and COO as previously announced Patrick will be assuming the CFO role for PFG at the start of the calendar year.
We issued a press release regarding our 2023 fiscal first quarter results. This morning, which can be found in the Investor Relations section of our website at <unk> Dot com.
During our call today, unless otherwise stated we're comparing results to the same period and our 2022 fiscal first quarter as a reminder, in the second quarter of fiscal 2022, we changed our operating segments to reflect how we manage the business. The 2022 fiscal first quarter results have been restated to reflect the segment change.
The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found at the back of the earnings release.
With this fiscal quarter, we have updated our segment reporting metrics to adjusted EBITDA from the prior EBITDA metric segment results for the fiscal first quarter of 2023 and the fiscal first quarter of 2022 now reflect this change.
Our remarks on this call and 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, and our SEC filings for various factors that could cause our actual results to differ materially from our forward looking statements and projections now I'd like to turn the call over to George.
Thanks, Bill good morning, everyone and thank you for joining our call today, we're off to a fast start in fiscal 2023 with top and bottom line results exceeding our guidance and a strong backdrop for continued success.
Attributes from all three operating segments shows our company's broad based strength across channels.
Service, we continue to pick up market share and independent restaurants, while showing operational improvement.
Two factors and our strong profit performance this quarter as underlying momentum was further boosted by the recovery in many of their channels, providing profit growth that exceeded our prior announced expectations. Finally, our convenience business remains robust.
With additional business wins in the food foodservice and related products area. We have now owned core Mark for a little over a year and the results are better than we had expected when we announced the transaction.
Our consolidated results put us on track to exceed our original outlook for fiscal 2023 and to hit the three year outlook. We provided at our Investor Day in June as a reminder, our three year targets are for $62 billion to $64 billion of revenue and $1 five.
To $1 7 billion of adjusted EBITDA in fiscal 2025.
Today, I will share details on our foodservice and convenience business units before turning it over to Patrick Hatcher, who will give color on our visit our operations finally, Jim will provide an update on our financial position and outlook for the remainder of the full fiscal year as you saw in our press release. This morning, our first quarter.
Our results have allowed us to confidently raise our sales and adjusted EBITDA guidance.
This confidence is supported by the momentum our business has achieved our broad channel and product portfolio and the resilience of our customers and the consumers. They serve the backdrop for our business remains positive.
With the resumption of more normal consumer activity through the summer and into the early fall.
The slight moderation in restaurant traffic was more than offset by our market share gains a continued recovery across the store channels and steady growth in our convenience segment.
We closely follow the macroeconomic conditions and various outlooks for calendar 2023.
As we've highlighted we feel very good about our positioning in the market, which is reflected in our overall top and bottom line performance, we see our broad portfolio.
Away from home channels as a steady growth engine, even in a more challenging economic climate.
A few specific proof points for the quarter.
<unk> Foodservice segment continues to outpace the overall market, particularly in the important independent restaurant space in the quarter total independent restaurant cases grew six 9%, while organic and deployment pendant cases were up four 6% year over year, we continue to see market share.
<unk> across key independent categories.
Growth in independent restaurants has been driven by our strong performance in center of the plate proteins as well as our performance brands, which have remained at record levels.
Strength in these areas are significant contributors to our margin and profit performance in the fiscal first quarter performance brands penetration achieved an all time high and represented over 50% of our independent sales dollars for independent restaurants, we have focused on adding new accounts.
As we discussed last quarter penetration within accounts has slowed this higher inflation has impacted foot traffic. However, our ability to grow new accounts was a key factor in our organic case increase and bodes well for the future when foot traffic begins to Reaccelerate as we noted in this morning's press release our growth.
And independent restaurants was offset by a decline in our chain restaurant business.
We have shown caution concerning the chain business, we take on and we have focused our efforts on accounts that fit well within our distribution network, even with the case declines in our restaurant chain business. We continue to see improving profit contribution from this area of our business.
Part of the outperformance is the result of a slow improvement in our foodservice supply chain.
Recently overall foodservice inbounds fill rate hit close to 97% our supply chain is still has room to improve however, we remain optimistic that it continues to trend in the right direction.
We also benefited from improvement in our operational trends driven by staffing improvements and reductions and temporary labor.
As we have discussed over the past several quarters efforts to reduce temporary labor are expected to drive better productivity and lower expense ratios. We are seeing this materialize.
With consistent week by week improvement in service excellence lower levels of shrink and a decrease in warehouse overtime.
We believe there is still more improvement to come over the next several quarters, but it is rewarding to see the hard work of our foodservice associates translate into productivity gains.
Our foodservice segment is performing at a high level with solid growth in independent restaurants.
With increased efficiency in our operations the segment is producing higher margins and profit growth.
Service segment, adjusted EBITDA margins improved 55 basis points over the prior year period.
Turning to our convenience business, we remain extremely pleased with the progress core Mark has made as part of the PFG organization.
September we passed the one year anniversary of the closing of the acquisition.
In that year. The team has made significant strides as we integrate the organization, while continuing the consistent business momentum.
During the quarter, we announced our convenience business would operate under the core Mark brand demonstrating the collaborative effort of our entire <unk> team. The combination of the two management teams has been a seamless transition attribute to the management of both companies.
The results have remained impressive our non nicotine portfolio grew sales at a high teens rate in the quarter offsetting the low single digit decline and nicotine product sales.
The mix shift to higher margin food and foodservice related product categories continues to drive both growth and adjusted EBITDA margin improvement in the segment. In addition, our cost synergy capture remains on schedule.
We're excited about the prospects at core Mark and expect continued business wins to drive value from this transaction.
I'd like to spend a moment discussing the inflation environment and how it has impacted our business.
Overall product inflation.
In the fiscal first quarter was up 12, 3% year over year or sequential deceleration compared to the 13, 6% increase in each of the prior two quarters.
The deceleration in total cost inflation was driven by a sequential decline in the rate of growth in our foodservice segment, which saw inflation grow in the low teens compared to a high teen increase in the prior two quarters.
This is still well above historical levels, but a fairly sizable drops since the spring and early summer. The decline was driven by center of the plate protein such as meat poultry and seafood, which were close to flat on a year over year basis outside of these categories inflation continues to run well into the double digits.
With notable increases in dairy eggs produce and disposable items.
We believe inflation will continue to moderate and foodservice through the balance of the year.
And inflation at distorting the convenience segment remains high and actually accelerated in the fiscal first quarter.
To see significant pricing actions across a range of categories, particularly candy in tobacco and <unk> inflation was in the mid teen level in the quarter and increased sequentially in each month of the quarter up from a high single digit increase in the prior two quarters and.
And the convenience segment inflation was also higher sequentially, though not as dramatic an increase is that this star with convenience and placement ticking up just into the double digit range in the quarter and fairly steady across the three months of the quarter.
Inflation in these two segments has produced larger than typical inventory gains in the quarter. As we noted last quarter. These type of gains or not atypical, particularly for CPG categories like candy and cigarettes. We continue to expect these gains to moderate through the balance of fiscal 2023. This is all factored into the.
Updated guidance, we provided this morning.
To summarize we are very pleased with our first quarter results, which put us on the right track to have another successful full fiscal year.
We are getting top and bottom line contribution from all three operating segments and the backdrop should provide continued growth in the quarters ahead.
Our team has done an excellent job keeping operating expenses in check with improvement in labor due to lower levels of overtime and temporary labor costs, which is helping offset higher wages.
Product inflation is certainly helping our profit results, but our underlying business and market share gains are supporting long term profit.
We're very much on track to achieve our 2025 vision with that I'll turn it over to Patrick who will provide some highlights from Vista.
Thank you George and good morning, everyone.
This morning, I'll provide a brief overview of our performance at best are before turn it over to Jim for a review of our financials.
<unk> posted a great quarter helped by continued recovery in many of the channels that were particularly hit hard during the pandemic.
Dollar sales grew in every channel for best Saar.
Pending which remains <unk> largest channel saw double digit case volume increases year over year, producing strong sales growth.
Mrs were also up nicely and office coffee services and theater, despite an extended return to the workplace and lighter movie content in the fall period.
We would expect both theater and office coffee services to improve further in the second and third quarters as more workers returned to the office and the movie release calendar picks back up around the holiday season.
While smaller on a percent contribution basis office supply hospitality campus in concessions also grew case volume in the quarter.
<unk> sales growth on a one and two year basis.
All in so as far as net sales passed the 1 billion Mark for the second consecutive quarter growing nearly 29% compared to the prior year period.
While inbound fill rates continue to be a challenge for Vista, we have seen some signs of improvement in supplier Phil and this improvement continued through the end of the fiscal quarter.
Our organization successfully kept operating expenses in check providing leverage on our sales growth and resulting in solid profit growth year over year, and particular <unk> saw the benefit from lower overtime and contract labor costs compared to last year.
As a result segment adjusted EBITDA for the fiscal first quarter was up 146% compared to the prior year.
I am extremely pleased with how the Vista, our organization has stepped up to the challenges of the past several years have brought and believe the progress made over the past several months has put us in a better position than we were prior to the pandemic.
The team in place a burst or a strong I look forward to watching the organization continue to succeed as I move into the CFO role in the coming months I will now turn it over to Jim to review, our financial results and outlook in more detail Jim.
Thank you Patrick and good morning, everyone.
As George mentioned earlier, we began fiscal 2023 the same way we finished fiscal 2022.
And a position of strength outperforming our outlook on both the top and the bottom line underpinned by our solid financial position.
Our main strategic priorities remain the same sustained profitable sales growth adjusted EBITDA margin expansion and lower leverage.
Our results in the first three months of fiscal 2023 demonstrate that we are very much on track with all three initiatives.
We have continued to support the growth of our business through targeted investments and capital projects and strategic M&A.
We've made significant progress on both fronts rebuilding working capital to reflect the acceleration in demand increase our warehouse capacity.
To reflect our future growth potential and at the same time, we've successfully integrated reinhart and we're well on our way to a full integration of core Mark.
These actions have been important pillars in achieving our first two objectives profitable sales growth and adjusted EBITDA margin expansion.
I'd like to spend some time discussing our third priority reducing leverage.
It has been our focus to bring our leverage down to a range of two five to three five times adjusted EBITDA.
Very pleased to say that as of the end of the fiscal first quarter Pfg's leverage was within our target range closing the quarter at approximately three four times, our trailing 12 months adjusted EBITDA.
This was achieved by the strong adjusted EBITDA growth of our business plus targeted reduction in our outstanding debt balance financed by our cash flow.
In the fiscal first quarter, we generated about $316 million of cash flow from operations after accounting for $40 million of capital investment PFG generated more than $275 million of free cash flow.
This strong free cash flow generation allowed us to pay down about $246 million of ABL borrowings.
At the end of the quarter, we held $4 $1 billion of debt, including capital lease obligations.
About 77% of our debt is at a fixed interest rate, including interest rate swaps on a portion of our ABL borrowings.
Our weighted average cost of debt during the quarter was four 7%. Our ABL is attractive financing terms and we believe that even in a rising interest rate environment. Our cost of borrowing is very attractive and manageable with our cash flow profile.
With that let's quickly review some highlights from our fiscal first quarter.
PFG total company net sales increased 42% in the first quarter to $14 7 billion.
Which was above the top end of our guidance range.
Total case volume increased 16, 3% in the first quarter, including the contribution from acquisitions.
Total independent cases were up six 9% in the first fiscal quarter, while organic independent cases increased four 6% outperformance in independent case volume continues to reflect market share gains and new business wins in that important high margin business.
Total PFG gross profit increased 37, 9% compared to the prior year quarter.
Including the addition of the core of our business and the independent case growth, which I just mentioned.
<unk> contributed about $310 million in gross profit during the first fiscal quarter.
As George mentioned earlier, we did experienced deceleration in overall cost inflation as we move through the quarter, though inflation remains elevated on a year over year basis.
Total company cost inflation was up about 12, 3% as a deceleration in foodservice inflation was somewhat offset by higher levels of inflation at Vista and convenience.
While inflation has remained elevated we still expect lower levels of inflation through the remainder of fiscal 2023, which we have included in our guidance assumptions.
We continue to manage higher levels of cost inflation through our scale, which improves our buying power with suppliers. We also leveraged our product offerings with performance brand portfolio, which offers value to our customers.
These initiatives drive the positive mix shift and margin improvement reflected in our results and we believe will remain a tailwind for the balance of the fiscal year.
Gross profit per case was up about $1 <unk> in the first quarter compared to the prior year period, and the first quarter PFG reported net income of $95 7 million, an increase of $91 million over the prior year adjusted.
Adjusted EBITDA increased 93, 1% to $354 7 million.
As you may have noticed in this morning's press release, our segment reporting now shows adjusted EBITDA results for each of our operating segments.
We believe that this disclosure gives further insight into our underlying business results.
Diluted earnings per share was <unk> 62.
In the first quarter and adjusted diluted earnings per share was $1 <unk>.
As you saw in our earnings release, the strong start to fiscal 2023 has allowed us to confidently raise our guidance for the fiscal second quarter as well as the full fiscal year.
In the fiscal second quarter of 2023, we now anticipate 13 six to $13 9 billion.
Net sales, which is an increase from our prior range of 13, 5% to $13 8 billion.
We now look for adjusted EBITDA in a range of $260 million to $280 million or $15 million increase from our prior expectations for 245 million to $265 million of adjusted EBITDA.
For the full year, we now anticipate net sales in a range of $57 billion to $59 billion.
A $1 billion increase from our prior $56 billion to $58 billion range.
Adjusted EBITDA is now anticipated to be in a range of 123 billion to $1 three 3 billion up from our prior $1 $1 5 billion to $125 billion of expectation.
As George mentioned in his remarks this keeps us on track to achieve the three year 'twenty 'twenty five targets, we set at our June Investor Day.
Before closing I want to discuss a few items impacting the quarterly cadence and our outlook for the balance of the fiscal year.
As we have discussed on the past few earnings calls we've been benefiting from gains on inventories sold through at a higher price.
Due to the supplier led price increases.
This dynamic has been particularly impactful in the cigarette and candy categories.
Two of the large areas of business for <unk> and convenience.
These gains occur annually on a fairly regular basis. However, the recent pace of inflation and frequency of price increases from candy and tobacco manufacturers has produced higher than normal gains.
Inventory gains began to accelerate in the fiscal third quarter of last year and step up in both the fourth quarter and again in the first quarter in fact, the higher inventory gains in the most recent quarter led to a portion.
Not the majority of the profit beat compared to our adjusted EBITDA guidance.
The expectation underpinning our current guidance is for decelerating inflation over the next three quarters in each of our segments naturally this means lower inventory gains in each subsequent quarter.
Our outlook also factors in the strong inflation, driven sales and profit gains in the back half of last year.
With a particularly high comparison in the fiscal fourth quarter.
Given this dynamic we are increasing our outlook for the fiscal second quarter, and we will maintain our outlook for the back half of the year.
In summary, we are in an excellent position, which is reflected in our solid first quarter results and strong financial outlook for the remainder of the year, we are making great progress on our three focus areas sustained profitable sales growth EBITDA margin expansion and lower leverage.
We also generated significant operating and free cash flow during the quarter through a combination of profit gains and working capital management.
We continue to make quick progress on our integration of core mark while adding profitable new accounts.
Our organization is executing our strategy and we are well positioned to continue to create value for our shareholders over the long term.
Thank you for your time today, we appreciate your interest in performance food group and with that we'd be happy to take your questions.
At this time, if you'd like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing star to you. Once again that <unk> wanted to ask a question. We will take our first question from Edward Kelly from Wells Fargo.
Good morning nice quarter.
George Your independent case volume.
Total case volume flat can you just talk about what youre seeing on.
The demand front.
Thank you mentioned some elasticity on price.
Exited some chain volume I don't know if you can quantify that but just kind of curious as to how you could sort of like unpack that and then comparisons do ease going forward and I know you are.
You've targeted case volume growth. So I'm, just kind of curious as to how youre thinking about this the rest of the year.
Well October would be I guess, a little bit of a reflection of kind of where we're headed with things we have seen.
Slightly better independent case growth.
Our national account business, it's really varied we still have some changes that are doing real well, we have some not doing so well.
We really only did one what I would call exit of business we did.
Imposed a little higher pricing on on a couple of customers that.
Left just because of that.
But I think for us.
As our operations get better and we made significant improvement in Q1, that's continued into October youll see us a little bit more aggressive, but very targeted in that national account business.
Yes.
I would have to say that the.
The industry is.
Weaker.
As far as the restaurant business.
Don't think Thats a concern of ours, we're doing a good job of picking up new customers. I also think when you get into these pre election periods, particularly.
One followed as closely as this.
People tend to not go out as much it's a little difficult for the change to get.
Their ads out there that they normally would they are very expensive.
Competition for for ads, so all in all.
As we go into this deeper into Q2, when we look at the rest of the year, we actually feel quite confident.
Okay, Great and then just a follow up on gross profit per case.
Very strong performance up both for one dollar I don't know Jim if you could help on.
Unpack how much of that.
Relates to the timing of the inflation benefit that does ease over time versus.
Obviously all of the good underlying performance that you've had.
Kind of curious as to how much of this you end up holding on to and how we should be thinking about modeling that going forward.
Yes, I think the best thing I could do to help us.
To point you to the guidance that we provided.
And that factors in all of our expectations around in assumptions around inflation going forward.
We've held true to the continued belief and built in the assumption that inflation will begin to moderate.
And we use that in developing our guidance algorithm.
I think right now that's probably all I want to share about margins I guess, the last thing I would say is.
As we mentioned we had some inventory holding gains, but the vast majority of all of our improvement was due to the underlying business performance.
Can be prouder of how the business performed across the last quarter.
I'll give you a couple of other comments with it that I think are important to give.
We've always been a company that grew gross margin through mix.
That is more emphasized in this quarter than it's ever been so within our performance foodservice, obviously no growth in national accounts.
Continued growth in independent, but also <unk>.
Record levels of brand.
Penetration in actually October was another record for US there when you get to this star during the.
Period of time that.
We were depressed from sales from a COVID-19 standpoint.
More of our sales were in that what we call value area kind of the dollar store type area.
<unk> is not.
As mature for us or as profitable. So we had a nice benefit from customer mix within this star and then within core Mark If you think about having mid to high teen growth ex tobacco, that's where the better margins are tobacco.
Obviously, very low margin and we had slight.
Sales declines in tobacco. So we've had the benefit of mix all the way through and that is a much bigger benefit from us then.
The gains that we've made on our inventory.
Great. That's helpful. Thanks, guys.
Our next question comes from John Heimbach call from Guggenheim Partners.
Hey, George I know you guys are now in the motivating new accounts. So if you think about <unk>.
Case growth organic case growth going forward what percent of that do you think will come from new accounts as opposed to.
Wallet penetration.
And when you look at it.
Those new accounts.
Where are they coming geographically cuisine type.
Is there any trend there.
Hi.
New accounts.
Right now are really all of our growth now we're continuing to increase our lines.
Within the accounts, but.
That's not translating into increased.
Penetration within the accounts, because obviously, they're not buying as many of the existing lines.
Is that going to be that way going forward I think thats hard to tell it kind of depends on what happens in the marketplace, but for today.
We're counting on new accounts to give us the growth that we need.
As far as where those new accounts or are coming from I wouldn't say, it's any certain geography or any certain type of customer.
We're continuing to do very well in pizza, we are continuing to do very well Hispanic but it's pretty widespread as far as where we get the new accounts, particularly in the markets, where we're broad line.
Okay, and then maybe as a follow up to that right.
Maybe talk about from a core mark standpoint.
The.
Same thing right, obviously, bringing on new accounts there on the independent side is pretty consistent.
Where do you see new account growth.
With core Mark is that is that low single digit mid single digit.
And then what do you think the timing is on the lumpy accounts right I know theres opportunity over the next two years or three years.
Is any of that likely in the next 12 months or that's all out on the horizon.
Well, we have quite a funnel.
In that part of our business some of the sales will show up in performance Foodservice Some will show up in.
In core Mark.
Yes.
I don't think.
At this point qualified to say when some of these will come in.
We do have some business right now that we have no histories.
Part of the growth that we're getting in this non tobacco area, but we just feel confident that we're going to continue to be able to some either solidify some accounts by getting further penetration in that non tobacco area.
Or just continue to get new business.
Is chunky.
There is still a lot of independent accounts out there and I think that we're getting better and better at that we are getting more aggressive in that area hopefully that we will.
Give us a little less of this lumpiness that comes with with new business.
But that's that's our growth vehicle and core Mark just just like it is in our other business.
Okay. Thank you.
Our next question comes from Brian <unk> from Morgan Stanley .
Yes. Thank you good morning, guys.
Just a question on.
You commented on kind of over time and use of contract labor is there any way to think about where you stand on the use of that currently versus.
Kind of a normal period and how much more that has to run.
Yes, we've normalized contract labor I think.
Our operations team across the nation has done a very good job of.
Methodically and appropriately working that down across at least the last five quarters.
Done a really good job and we're at the point now where that's.
That's no longer a pain point.
Which means that we are spending more time, working on reducing overtime and driving productivity and making sure that we take care of those great workers out there in our supply chain, because we sure didn't need them.
Okay, great Thanks and.
Just on.
Maybe the the performance brands.
Mix of sales.
Could you remind us kind of where that spend in the past.
And obviously youre doing record levels now, but how do you kind of continue to push that higher.
Well.
<unk>.
March from high <unk> to just over 50.
We almost 51% in the month of October .
As far as where we can go with that we do have we do have a few companies over 60.
Those are.
Kind of legacy Pizza companies, where we do a much better job. So I am not sure where that goes.
And not trying to be evasive with it but we really don't know where at a higher level than we expected at this time.
And we've just seen tremendous performance.
On the legacy Reinhart companies as they've been able to get involved with.
The brands that they currently used and continue to use and kind of putting in some of our performance brands in there with it so.
We think that there's probably more upside and reinhart and there is some performance.
But we're comfortable with where we're at in slightly surprised that we got here as quick as we did.
Alright, thank you.
Our next question comes from Mark Carden from UBS.
Good morning, and thanks, a lot for taking my questions to start just given some of the increased economic uncertainties are you seeing any competitors, becoming more aggressive on pricing.
The temptation exist for them.
A bit more maybe not seeing the same type of market share growth that you are or are things remaining still pretty rational to date.
Our industry is very competitive it always has been.
I think that it's quite competitive.
And a rational.
I mean, we.
We love being competitive right.
There's just so much more to adjust price and how people make their decisions.
Our industry. So we work as hard as we can work on those.
Important areas to the customer that arent just price and we feel good now because we feel like we've got our operations back in order.
And we can pivot a little bit more towards growth and we've been able to do really well.
Yes, probably four plus quarters, we've been really challenged operationally and we feel good now.
Great and then a follow up on the convenience business how much of an impact are fluctuating fuel prices, having on demand are you seeing customers, becoming any more or less sensitive given the current economic backdrop.
That's been interesting to watch.
Typically high fuel prices helped to non.
Particularly non tobacco sales because people come in more frequently because a lot of people aren't filling their tanks. They have a certain amount of money, they're going to put in their tank and that frequency goes up when the fuel was really high we did see the opposite.
People coming in less often being very frugal about their use of fuels, but we also saw the average ticket go up during that period of time.
And now we're seeing obviously fuel prices come down some but we're continuing to see a little bit soft on the traffic but.
A good a good ring when people come in the store they are buying a little bit more than normal.
Great. Thanks, so much good luck.
Thanks.
Our next question comes from Jeffrey Bernstein from Barclays.
Great. Thank you very much.
Two questions. The first one just on the <unk>.
Cash usage.
Obviously beyond further penetrating existing accounts and adding new accounts M&A.
Always a topic of interest and I think you mentioned in your leverage is now within the target range. So I'm. Just wondering if you can talk about your thoughts on uses of excess cash maybe any change in your M&A strategy in terms of particular geographies or segments or foodservice versus convenience store just wondering what's out there in terms of potential opportunity for for M&A with led.
Desired levels, and then I had one follow up.
Yes.
<unk> strengthened how we approach M&A I think it's a difficult time for it.
We now have a senior VP of M&A and strategy, who has got a great background in that and she is fairly new in that position and learning the business, but we have pets.
Patrick.
<unk>.
Who ran Vista for years actually was.
The one that really built that business he's very involved in our M&A and we've got a lot in the works I don't.
I think I can tell you that we have things that are actionable right now, but M&A is always going to be important part of what we do.
And we want to be aggressive and really all the channels and all of the businesses that we're in.
Okay.
Understood and then.
Just think about the broader restaurant industry I know through Covid, there was talk about significant restaurant closures.
Maybe it didn't end up being as severe as people feared but maybe in the 10% range for the total restaurant industry.
Independents work.
Higher than 10% and change maybe below but.
Unit that is hard to come by without your help so I'm just wondering post close.
We had assumed there'll be a bounce back I'm just wondering if you could talk about the current environment, maybe total units versus pre COVID-19, what's kind of changed in terms of the total restaurant industry with closures and then presumably some some reopening or maybe maybe not as many reopening because we thought any thoughts would be great. Thank you.
I think that.
We can only speak to that based on our customer base and obviously, we don't have huge shares I think part of.
Why the same store sales are hard to come by right. Now is there are a lot of new restaurants opening.
There are certainly many more open today than there was during the peak of Covid, so customers have more options.
And.
And they're there.
Frankly in their business around to more people than before.
And.
I think that's healthy for the business I wouldn't like to see us get.
Where we have too many seats, which has happened to us before I think.
For us a really good sign as to how resilient businesses.
On the West Coast of Florida for Us where we have.
Significant amount of customers, who did not open back up after that hurricane yet we're doing more business than we did before then which shows me that they are finding the place to get out too.
The desire is still there.
And even with less restaurants, we're doing more business. So it's a very resilient business and people like to eat out.
<unk>.
I think as long as we don't get ourselves in a position where there's just too many I think its going to be a very strong industry.
Thank you.
Okay.
Our next question comes from Andrew Wolf from CL King.
Good morning, and also congratulations on the strength across the.
Segments.
I wanted to ask about.
Sort of looking at volume versus an increase in operating expenses by the segment.
And so it's sort of from the outside you can kind of think of that maybe as a proxy for.
Labor productivity.
And then just appears as I kind of do those numbers that.
<unk> is now.
Having much better operating leverage on labor productivity.
Foodservice, but you guys are saying.
Those kind of metrics are improving across the board. So I'm just asking you to kind of if you would contrast, well first of all tell me if I'm kind of thinking the right way, we're analyzing things right way.
Versus your internal metrics and.
It sort of imply that things are getting better foodservice has a long way to go and I'd like to get.
Just your sort of sense of.
How how quickly foodservice labor productivity can improve now that the labor markets normalize.
We have a ways to go when it comes to productivity in our performance foodservice area, which frankly, we haven't.
In <unk> as well and to a greater extent than core Mark that's one of the encouraging thing sure future because we really feel like we will get that back.
Back to pre Covid levels, we are not there yet.
We also in this star was a real surge in volume destroy was much more negatively impacted by Covid and the other areas.
Anytime you get that kind of influx and business, you're better able to leverage it.
But we still see potential within this started to be more efficient than we are today.
And I guess.
Do you have.
Any sense of the cadence do you think it's improving at an accelerating rate or <unk>.
Too early to tell.
When labor productivity gets back to a pre COVID-19.
Or if it does.
Yes look I think there's a couple of ways, we can respond to that first.
To summarize each division has approved improving across so many fronts yet they havent peaked by any means labor is one of the areas that continues to improve.
And as is a very nice tailwind and helpful. But there's room for more improvement in labor.
And our own brands and service levels supply chain productivity and efficiencies.
It is it is a very positive place in a great position of strength to come from to realize that the company is performing well yet we have so many key metrics that we know we can improve on and we are confident that we will improve.
Hopefully that's helpful I guess from a cadence standpoint.
We believe we bundled it up well and it's reflected in our guidance.
The rest of this year and the fact that we feel confident in our long term outlook as well.
Great. Thank you for the color I appreciate it.
Next question comes from Lauren Silberman from Credit Suisse.
Okay.
Thank you so I wanted to as a performance brand cases, the grower as well as record penetration, what's your sense of what's driving the growth are you seeing any shift in taking out more value and fill rates are you guys getting more aggressive on your end.
Well I think we're always aggressive with our brands.
I think the biggest reason is probably just the intense training that we've put our people through.
Pretty fanatic about our brands and making sure that our.
Our salespeople understand the difference between what we have and maybe what others have.
And that that takes time and you have to do with Theres a lot of good branded product out there in our business.
Our competitors are equally.
Serious about their brand.
<unk>.
And I think that.
Any time things get a little bit soft I think people get a little more price sensitive or price value sensitive.
And that's probably helped us as well.
Great Thanks for that.
The star segment, the inflation accelerating in candy and tobacco do you expect these prices to hold so better said can we assume pricing is stickier and the CPG channel relative to what we might see in food service understanding that the inventory gain.
Yes.
Right as we look ahead.
Any.
Possibility of deflation.
Is really more in performance foodservice than it is anywhere else with maybe the possible exception of coffee coffee can be pretty volatile.
What we have always seen in our other businesses outside of foodservice as people fight pretty hard to get their price increases.
And once they get those.
Strong narrowly unusual to see them go back.
And pricing.
They could skip an increase.
If things were to change in their input product goes down, but that's historically, what we've seen now.
Our inventory gains typically are what was was in.
Jim's prepared remarks.
The big one so the CPG type ones.
And those tend to come with fairly good regularity, we've just had a little bit more here hopefully.
Great. Thank you and then just last one from me the acquisition in Foodservice. This quarter can you give us any more color on sort of the nature.
Matt.
Baird.
Would that be merchants.
Oh, okay.
Yes.
No we do not have anything since merchants.
Got it very helpful. Thank you.
Our next.
Comes from Kelly Bania from BMO capital.
Hi, good morning, and thanks for taking our questions.
I guess there was a cure.
Maybe I'll try asking again, if you can quantify.
Inventory gain.
On Q1.
How much that was inconvenience or <unk> or maybe said another way.
The underlying EBITDA margin.
And are more in line with historical.
Performance for them.
So I'm just trying to make sure we're thinking about.
Modeling this for next year.
It should be going down.
And profitability next year as we lap that.
And also I guess same question for <unk> and the guidance range for Q2, really just reflecting just inventory or some more underlying performance coming in better than expected.
Yeah, Kelly, it's Jim So the guidance raise in Q2 is about underlying business performance continuing to improve.
Not related to continuing inventory gains as far as Q1, we had a very good quarter, we had a good quarter on many different fronts, one of those fronts and we categorized it I guess the majority.
Of the improvement was in the underlying business, implying much less and the majority was in inventory holding gains.
I would want you to know that the business is doing really well did do really well in Q1 and our profitability improved.
Well before recognition of inventory holding gains.
Okay. That's helpful.
And then.
Maybe I missed this but can you just help me understand a little bit more of the case.
<unk> trends.
Convenience and the star and maybe the story.
Tobacco and non tobacco within convenience, but just.
Where are we and how do you expect those to progress as we move forward.
Yes, when it comes to that.
The tobacco business I can't say that I can speak to that it's not something that.
That I really spent any time on or follow closely and I don't know that anybody knows but.
Theres been a gradual reduction for several years and that will probably continue.
But like I say im no expert when it comes to the.
The rest of the convenience store I think we're going to continue to do well.
We have seen actually acceleration from the first quarter.
We.
We.
We hope that that continues its been very good.
Also as with <unk>.
This start a lot of it is those channels coming back in us coming back in a better position within those channels than we were pre COVID-19 that would be the way that I would look at it.
Our next question comes from Nicole Miller from Piper Sandler.
Thank you good morning.
Can you dig a little bit more into that convenience store commentary on the one hand, it sounds like it might be the piece of the business growing the fastest I also wanted to understand you could have less traffic and more spending do you net out more total sales if im understanding that properly and <unk>.
Little bit about the center aisle versus the perimeter and the opportunities there in sales and margin. Thank you.
Yes, where we have the customer we tend to have the center aisle of the non DST items.
Just part of a program that we would typically have with them. It's the outside of the store where.
Core Mark has not been really robust with the amount of inventory available.
In foodservice product and as we.
Either.
Get more product to satisfy that customer's needs into the core Mark facility are also deliver it out of performance foodservice, that's where greater growth is available for us the bulk of the growth that we will get.
Inside the store will be new accounts.
I say its center aisle.
Sarah.
Can you at discrete example, like products that you would want that would kind of unlocked this whole thing and if it's a lack of product availability. That's a domino effect I imagine is something else that could be curious and say, maybe that's labor I don't know, but like where does that.
Ah.
Where does that issue really sad if that makes sense.
Well.
Problem that we would have out of our core mark facilities, just sheer physical capacity.
The ability to.
To have the size freezer basically is needed and then.
You have to have the right inbound volumes.
We don't always have that so many of these customers are just better suited to be delivered by performance foodservice.
And then on the balance sheet and Gannett straight up admit it's not a fair question, but.
The market loves you mean, everything and obviously today is a great reflection, but if I take today out of the equation.
Stocks companies with leverage Werent as favored of late.
And I would not imply that you would do something that doesn't work fundamentally for the company for the stock. However, it's tied to interest rates in that environment is entirely different.
Ultimately understandably very comfortable with your leverage as it stands today when you take into account where interest rates are and going.
Why not make that even more of an opportunity.
Even less debt essentially thank you.
Yes, Nicole it's Jim Yes, our intention as of today is to continue to pay down debt and continue to work down leverage.
As I assume you would expect us to do.
I think your explanation makes good sense and I would tend to agree with it.
Thanks, guys appreciate it.
Our next question comes from Joshua Long from Stephens, Inc.
Great. Thank you for taking my question wanted to circle back on the labor side it incur.
Encouraging to hear that the contract labor has.
Gotten under wraps it sounds like labor sourcing is improving as well if that's true maybe.
The commentary around just what's been able to how you've been able to address the the improved sourcing and then as we shift over to been thinking about the retention piece I imagine that's an opportunity for you as well any sort of initiatives or thoughts you can share there in terms of how you plan to address the retention piece.
Yes, thanks for the question look.
I want to be thoughtful here and the response, we are improving on the labor front across all aspects, we have room to improve considerable room. So I want to make that clear <unk> actually see that as good healthy opportunity across the mid to long term.
We're doing things that work for us as far as improving our ability to source workers.
And improving our ability to retain workers we.
I think the best way I would describe it as they matter to us they are important to us and we wanted to take care of our supply chain associates for sure, but as far as given specific details around how we are attacking it.
I think some of those things are a differentiator.
I'm not going to explain them in detail right now.
I appreciate the question.
Understood. Thank you for that but when we think about the cross selling opportunity that we've talked about in the past could we readdress that are just revisit that in terms of where you're at versus expectations of what the longer term opportunity is as we think about now having about.
Core Mark here with over the last year. So just.
How that's unfolded in if there's additional opportunities from a cross selling perspective.
I do feel there is additional opportunities I Couldnt tell you that we have this totally figured out at this point.
But the two companies are working very close together, particularly on the foodservice part of the business.
Also we've got some good activity going on between the core Mark area.
In the <unk> area, particularly now that Scott Mcpherson overseas both of those businesses.
And we just feel we have a bright future and a lot of work to do but we've got a bright future with it but as far as any details around what we're doing today.
We're still working.
Understood and we're looking forward to continued updates there.
It seems like the supply chain improvement or the boost the backdrop for continuing improvements in supply chain and I think you mentioned some improving inbound fill rates is that right.
Is there still room, there should we expect that to continue to improve steadily over time, just any sort of context, there as we think about the broader supply chain environment.
Within the context of what remains relatively challenging.
Operations overall.
Yes, we've seen good improvement inbound, particularly in performance foodservice, we haven't seen.
As much gains.
Our suppliers within just star in core Mark.
Our expectation is that we as a company should get our service levels and our productivity back to pre COVID-19 and our suppliers should get there.
Service levels.
And their fill rates back to pre COVID-19 levels. So we're not there yet they're not there yet and I think that.
Both groups people will get there.
Thank you.
Thanks.
We'll take our next question from Peter Saleh from <unk>.
Alright.
Great Thanks, and congrats on a great quarter.
I just wanted to come back to the conversation around the <unk>.
The Italian Pizza segment, given your exposure and Theres been some concern.
Pizza fatigue coming out of Covid, given the surge we saw over the past couple of years, just trying to understand maybe you can give us a little bit of color on what youre seeing in that category in terms of our most of the sales coming from just straight up price increases are you seeing volume improvements among independents just.
Trying to understand what you guys are seeing in that category.
Yes, we're seeing volume improvements, we've seen a little bit of a tick up so far in this quarter. It is not by any means what I would call real robust I mean, nothing compared to what it was during the kind of the peak periods of Covid when there werent as many options for the customer.
I would say that what's driving our business. There today is new new accounts.
That's kind of our lifeblood there.
The same store sales growth is just not not there currently and you can see that in the big change as well.
<unk> through.
Comparisons with those numbers from last year, but our into our business within that.
That segment is growing our shares are growing at the best rates.
That we've seen as far as the type of reporting that we get so we're pleased we're pleased with our group of people there and we're certainly pleased with our brands and the product offering that we have.
Great very helpful. And then just on the labor side coming back to that conversation good to hear that youre seeing improvements on labor and I understand that youre not exactly where you want to be but Jim I think you mentioned, reducing overtime as an as an area of opportunity.
Is there any way to quantify.
Where you are on overtime usage versus where you've been and where you think that could go.
Yes, we haven't given any specific numbers around it I would just say that overtime is higher than we would like it to be but.
Sure. They appreciate the fact that folks are working really hard out there to get the job done by the end of the day.
So we know that overtime, we will continue to go down as productivity continues to improve.
Alright, Thank you very much.
The next question comes from Carla Casella from Jpmorgan.
Hi.
That question has already been answered, but can you just give us an update I may have missed it if you said at the beginning I missed the beginning.
The percentage of exposure you have to tobacco now performing.
Pro forma that we have core market and therefore, our full year.
Our tobacco sales.
Yes, our tobacco sales are running slightly behind last year, a very very low single digit declines.
So obviously it's.
A lesser percentage of our total business, but if you look at core Mark specifically mid.
Mid to high teen growth in non tobacco slight decline in tobacco so.
The mix is swinging.
At a pretty good rate right now towards more towards the non tobacco and <unk>.
I'd refer you to the K you can find you get that in our K Thats right. Okay, Youll break out what percentage of total sales tobacco is in the K.
That's correct.
Okay, great. Thank you.
And once again, if you'd like to ask a question star and one we will take.
Our next question from Jake Bartlett from <unk> Securities.
Great. Thanks for taking the questions.
Firstly I wanted to ask about way.
Wage inflation wage rates and how they've been trending one thing we've heard from restaurants that have reported this earnings season is an expectation for very strong wage inflation mid single digits through 2023, So I'm wondering if you're expecting the same expecting.
Fairly tight labor market for your costs will be going up on wages.
Into the next year.
When I have a follow up.
Yes.
If you look at.
Where we've gone with the wages during the Covid period of time, we tried as best we could to.
Make sure that we kept.
Kept our people we didn't want a lot of turnover and we did a good bit of it through one time nonrecurring.
Sign on bonus and stay bonuses and things like that but any market, where our studies showed that we were.
Paying it under the market rate, we brought the market rate up.
Yeah.
And didn't hesitate really to do that.
We didn't have to do it in many areas we were fairly effective.
With how we were paying and Thats, how we will be in the future too I mean, we're going to make sure that we're at market in every market not necessarily the person that's driving the market up but we want to make sure that we get good people, we've retained the people and it's not easy.
And.
People don't make decisions solely about how they're compensated, but we understand the importance of it.
And we make sure that we're on top of it.
Great and then my other question was on product inflation in the foodservice business.
I think you've talked about it.
Decreasing from current levels, but if you can be any any more specific would be helpful. What you're expecting in fiscal 'twenty three.
As I look at it we think there's probably there's more.
More risk of deflation in center of the plate items.
My impression just hoping you can confirm or correct me, if I'm wrong, but my impression is that.
Proteins some of them.
Some of the plate items or our price.
Dollar per case basis so.
Actual deflation.
Deflation in those items that would impact your kind of gross profit per case.
So maybe if you could just confirm that I'm trying to think of how deflation in that.
Part of the business would impact your gross profit.
Yeah I'll take the first part of the question and George will certainly address the second part as far as.
How we're looking for inflation to move throughout the rest of the year no. We havent provided additional detail. The color. We provided is based on where it is today, we expect it to methodically moderate and move down, but we haven't provided any more information than that I do think that if I provide a much more detailed than I have.
It would imply that I know more than I do and can predict inflation.
I think thats, a very difficult thing to do right now.
Yes, I would add to that is that.
Your comment around gross profit per case.
Or gross profit per pound is very accurate, that's how we price those center of the plate items.
We've tried as best we could to predict inflation, we're probably not any better than anyone else.
We did do some very targeted purchasing.
Ahead of price increases without having any real significant increase in our actual amount of inventory and we were very effective there.
And I think the important thing is that.
To recognize is that our inventory gains come from sequential inflation.
We actually in our performance foodservice business.
The quarter experienced some.
Sequential deflation.
We continue to have the inflation in our other two businesses.
Particularly late in the quarter.
We saw some sequential deflation.
So I think that.
What we see and we're no experts from what we see.
The inflation is starting to moderate and go the other way when it comes to center plate.
Great. Thank you so much.
It appears that we have no more questions. At this time I will now turn the program back over to Bill Marshall for any additional or closing remarks.
For joining our call today, if you have any follow up questions. Please contact us at Investor Relations.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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