Q2 2023 Performance Food Group Co Earnings Call
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 as a reminder, in the fiscal first quarter of 2023, we updated our segment reporting metrics to adjusted EBITDA from the prior EBITDA met.
Eric Accordingly, the segment results for the second fiscal quarter of 2022 have been restated to 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 statement section in today's earnings release, and our SEC filings for various factors.
That could cause our actual results to differ materially from our forward looking statements and projections now I'd like to turn the call over to George.
Thanks, Bill good morning, everyone and thank you for joining our call today.
The momentum we saw in the fiscal first quarter carried through in the second quarter with solid top line results in larger than anticipated margin gains.
Which drove a nice profit be compared to our published expectations. We are also experiencing very encouraging signs in the more recent weeks with an acceleration in our case growth, particularly in the independent restaurant channel. Some of this improvement may be related to the impact from <unk> in the prior year period. However, we believe.
There are signs of a more stable landscape begin calendar 2023.
Our business units are also operating at a very high level producing outstanding top line results, while driving efficiencies to fuel our profit growth and margin expansion.
This aligns with our three main objectives, which include consistent profitable topline growth.
<unk> EBITDA margin expansion and leverage reduction.
As you can see from our fiscal second quarter results, we are making progress on all three of these fronts, which we believe will drive long term shareholder value. This morning, I will provide a few thoughts on our business results economic factors and our vision for the future. Patrick will then review our financials and guidance assumptions as you will hear.
From Patrick we are pleased to be raising the bottom end of our fiscal 2023, adjusted EBITDA guidance range, just some months removed from the increase we announced at the ICR Conference. We also reiterated our three year outlook and believe we are very much on track to achieve these targets in fiscal 2025.
In a moment I will talk through the reasons that we feel confident in our outlook for this year and beyond.
We have designed our business to be successful in a range of operating environments with three distinct operating segments.
Each with its own model characteristics and growth opportunities. We are already seeing the benefits from this structure and believe it makes us unique in the marketplace. A few thoughts on how each of these business units are achieving success.
I will begin with our foodservice segment strong operating results in foodservice in the fiscal second quarter were similar to trends from the fiscal first quarter, our independent restaurant case growth outpaced independent industry growth yet again.
Offset by softer chain restaurant business as we've described some of the softness in changes related to business. We have exited in addition, there is softness in foot traffic that is producing lower same store sales for our customer base. We believe we have struck a good balance within the national chain account business with a focus on profit.
<unk>.
And return on capital.
In the independent restaurant area. Our results continue to impress our organic independent restaurant cases grew four 3% in the fiscal second quarter just below the four 6% growth we experienced last quarter.
We have high expectations for our independent case growth and are working hard to improve upon these numbers. However in the context of the operating landscape and the market share data. We receive we're very pleased with our performance compared to the industry trends.
Once again our growth in independent restaurant case came from the addition of new accounts in fact, new account growth exceeded case growth, which is rare for our company. We are pleased with the pace of new account additions and believes that these customers will provide a long runway for volume sales and profit growth in the future.
Furthermore, in the month of January independent case volume was quite strong which was certainly encouraging. However, we do feel our comparisons were impacted by omicron last year.
We're also seeing success in our performance brands, which continue to do exceptionally well and once again achieved record levels of independent restaurant penetration.
Company owned brands have filled an important need for our customers providing high quality products at a good value and help with customer retention.
This helps offset persistently high year over year inflation without sacrificing quality, we continue to expand our company owned brands with new product offerings and new categories.
Inbound and outbound fill rates for foodservice have continued their steady March forward by the end of fiscal second quarter inbound fill rates were approximately 97% for foodservice without bound fill rates approaching 99%. We believe there is still room for improvement on the inbound side. However, we are getting.
Increasingly close to historic levels from our supplier community.
Before moving on I wanted to speak to the inflationary environment in foodservice once again during the second fiscal quarter inflation decelerated. It month by month and ended the quarter at nine 6% for our foodservice products. We continue to believe that inflation normalization is healthy for the market.
Our customers and their consumers and we are pleased to see the year over year inflation declining.
Still we must manage the dynamics closely to remain competitive in the marketplace, while not sacrificing profitability.
We have systems in place to accomplish this goal and feel comfortable that we can remain successful in a decelerating inflationary environment.
In fact during the second fiscal quarter, our inventory holding gains were down year over year due to the accelerating rate of inflation. This was true in both foodservice convenience and as a total company. This is to be expected and how we monitor our full year guidance, our ability to grow profit and margins without.
At the same level of holding gains demonstrates our company's ability to manage through this environment and should provide confidence in our profit path in the quarters ahead.
Turning to Vista. The recovery continues in many of his stores channels, which is reflected in another strong quarter for this segment.
Total just our case volume was up in mid single digits compared to the prior year period, driven by growth in multiple channels, including office coffee and vending at the same time the theater channel did not quite live up to the high expectations for December with several blockbuster releases not generating as much office revenue as it was.
And we expect it.
Again, the high quality sales and profit results. Despite a slower recovery in the theater channel speaks volume about the execution of that organization.
Another encouraging sign for <unk> because.
As the improving inbound fill rates, while still tracking well below historic levels fill rates have moved steadily higher throughout the first two quarters of the fiscal year with inbound rates now in the mid eighties without down rates in the high eighties.
Suppliers have indicated that better access to raw materials and stability in the workforce are producing improvement in fill rate levels.
Still room to go but there is another tailwind working.
In <unk> favor that we believe will help support topline momentum.
Finally, a few comments on our convenience business. We are pleased with the direction of this segment and see significant profit growth opportunities in the years ahead.
In the fiscal second quarter convenience did did see a moderate decline in profit due to the lower inventory holding gains that I just discussed.
Excluding the inventory gains in both years Q2 convenience segment's adjusted EBITDA would have grown nicely compared to the second quarter of 2022.
I will also note that convenient results convenience results in the month of January were excellent versus January of 2022.
Margin expansion the convenience segment is being driven by several factors, including better top line mix and operating efficiencies. We are particularly pleased with the growth of our non nicotine portfolio, which experienced another quarter of mid teens sales growth year over year.
We believe that a significant amount of shareholder value derived from the core Mark transaction will come from Pfg's ability to grow food and foodservice related products into the convenience channel faster than core Mark could have as a standalone company.
We are seeing this play out in the market, but believe it is still early days.
We have a steady pipeline of potential new business in the convenient space, which we expect to produce consistent topline growth for the segment.
We're also right on track to achieve our three year synergy target of $40 million. We remain very pleased with how the integration of core Mark has proceeded and are excited for what's to come within the convenience segment of our business.
In summary, we closed calendar 2022 with good company results, beating our previously announced profit expectations through a combination of high quality top line growth.
Positive product and channel mix shift and consistent productivity improvements.
The operating environment has provided some challenges, though it was steady through the quarter and we are seeing some hopeful signs early in calendar 2023.
Our organization has done an excellent job driving efficiencies, which has produced consistent top and bottom line results for the company.
While there are still some uncertainty in the broader macroeconomic environment, we believe our outlook for future.
As bright and there remains significant opportunity to keep our growth momentum going.
With that I will turn the call over to Patrick to review, our financial results and outlook in more detail. The CFO transition from Jim to Patrick has been excellent. It is typically a challenge to enter a new role and often even more challenging to exit Jim and Patrick accomplished a smooth transition which is.
Been seamless for our organization.
Patrick.
Thank you George and good morning, everyone.
Our business results in the fiscal second quarter of 2023 exceeded our announced expectations with sales in the quarter at the top end of the outlook. We discussed on our first quarter earnings call and adjusted EBITDA nearly $30 million above the outlook, we provided at that time.
Our operating performance has allowed us to build upon an already strong financial position.
As George mentioned this is my first earnings call in the CFO role for PFG Im excited to continue to help lead the organization to New Heights, and Thats entered my new role with a strong business position.
Our main strategic priorities are unchanged and we will focus on three areas to drive volume sustained profitable sales growth.
Adjusted EBITDA margin expansion and lower leverage.
Pleased to report that we once again made progress in all three areas during the second quarter and we are optimistic that this will continue.
Before reviewing some of the financial highlights for our fiscal second quarter I'd like to review two important areas.
Cash flow and leverage.
Our organization has been diligently focused on driving strong cash flow, which is an important objective in our growth strategy over the first six months of fiscal 2023, PFG generated approximately $425 million of operating cash flow through a combination of our solid business results.
And improvements in working capital.
This was significantly higher than our cash flow in the prior year period, despite tobacco purchases that occurred towards the end of calendar 2022.
We expect these tobacco purchases to be cash generative in the fiscal third quarter of 2023.
With this operating cash flow, we invested about $98 million in capex during the first six months of fiscal 2023.
These capital projects are vital to our long term growth in our primarily focus on increasing our warehouse capacity improving supply chain technology and streamlining our operations.
Investment back into the business will remain one of our top uses of cash and sustains our long term sales growth and margin improvement objectives.
After taking capital spending into account PFG generated about $326 million of free cash flow in the first six months of fiscal 2023.
<unk> majority of this cash flow went to reducing the outstanding balance on our ABL facility.
Just to another key priority reducing leverage.
Last quarter, we shared that we had reduced leverage to just below the top end of our two 5% to three five times target range. We were pleased with this achievement as we moved into our target range faster than we had anticipated.
This focus has continued to pay off and at the end of our fiscal second quarter. We achieved a three three times leverage ratio on a trailing 12 month basis.
We believe that lower leverage, particularly in the current interest rate environment is a good value, creating use of cash flow for our investors and other stakeholders.
Our balance sheet and debt position is strong.
At the end of the fiscal second quarter about 76% of our outstanding debt was at a fixed rate, including swaps. We have in place against a portion of our floating rate ABL facility.
While our average interest rate on the ABL facility did move higher along with the broader market. We have mitigated a significant portion of our floating rate exposure.
We are well equipped to manage the interest rate moves, but keep in mind that we would expect our average interest rate to move along with the market on the portion of our ABL facility that is not hedged.
With that let's review some highlights from our fiscal second quarter.
As disclosed at the ICR conference a month ago PFG total net sales increased 8% in the second quarter to $13 9 billion, which was at the very top end of the outlook. We discussed during the first quarter earnings.
Total case volume increased 3% in the second quarter, driven by growth of independent restaurants, as well as gains in <unk> and a small contribution from an acquisition.
Hello, Independent cases were up six 6% in the second fiscal quarter, while organic independent case increased four 3%.
Outperformance in the independent case volume continues to reflect market share gains and new business wins in that important high margin business.
Total PFG gross profit increased 17% compared to the prior year quarter.
Gross profit per case was up about <unk> 81 in the second quarter compared to the prior year period.
In the second quarter PFG reported net income of $71 1 million.
Adjusted EBITDA increased 28% to about $309 million.
Inflation continues to impact our business and as George discussed earlier on the call inflation continued to moderate to lower year over year inflation in the foodservice segment.
Total company cost inflation was 10, 3% in the quarter. This included a nine 6% increase in foodservice.
This is our inflation remained at the mid teen level in the quarter, while convenience experienced inflation just above 10%.
Inflation for both <unk> and convenience are very similar to what they experienced in the fiscal first quarter.
We continue to expect lower levels of inflation through the remainder of fiscal 2023, which is the assumption embedded in our outlook. Our early read on January supports this view with inflation, particularly in the foodservice segment continuing to slow.
On a consolidated basis inventory gains were lower in the second quarter of fiscal 2023 with a notable decline in convenience and a smaller decrease in foodservice, partly offset by a slight increase of <unk>.
We are pleased with our total company profit result, which more than absorbed the lower inventory gains compared to the prior year.
We expect a similar dynamic through the rest of fiscal 2023 and into the first quarter of fiscal 2024. However, beginning in the second quarter of fiscal 2024, the comparisons ease considerably based on our most recent results and expectations for decelerating inflation over the next.
Two quarters.
The company's second quarter, adjusted EBITDA margins increased 33 basis points compared to the prior year period, a solid result in any operating environment.
However, this margin performance was even more impressive considering the headwinds from lower inventory gains excluding inventory gains in both periods total company adjusted EBITDA margins would have increased even more year over year for the quarter.
We expect net gains from worker productivity, including lower overtime and temp costs to help offset the inventory gain headwind over the next three quarters.
Diluted earnings per share was <unk> 46 in the second quarter and adjusted diluted earnings per share was <unk> 83.
As you saw in our earnings release, we have reiterated our full year 2023 revenue outlook and raised the bottom end of our full year adjusted EBITDA range.
This comes just a month after increasing the adjusted EBITDA range at the ICR conference and reflects our confidence in the underlying business momentum and consistent execution from all three of our businesses.
In the fiscal third quarter of 2023, we anticipate 13, 7% to $14 billion in net sales. We also expect adjusted EBITDA in the range of $270 million to $290 million in the fiscal third quarter.
Remember that the seasonality of our fiscal third quarter typically reflects lower sales and profit in the months of January and February with an acceleration in March.
For the full year, we still anticipate net sales in a range of 57 to 59 billion. Adjusted EBITDA is now anticipated to be in a range of $1 7 billion to 135 billion up from our prior one $2 5 billion to $135 billion expectation.
As George mentioned in his remarks this keeps us on track to achieve the three year fiscal 2025 targets, we set at our June Investor Day.
To wrap up our company is in a great financial position, which is reflected in our earnings result, and financial outlook for the remainder of the fiscal year, we are making great progress on our three focus areas sustained profitable sales growth.
Adjusted EBITDA margin expansion and lower leverage while generating significant operating and free cash flow.
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 would like to ask a question. Please press the star and one on your Touchtone phone.
You may remove yourself from the queue at any time by pressing star two.
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Ask a question we.
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We'll take our first question from Edward Kelly with Wells Fargo.
Hi, good morning, guys.
Nice quarter.
I wanted to first just touch on the procurement inventory gains.
Just can you talk about.
These gains in Q2, I know theyre down year over year, but how do they compare to what you would consider normal.
And then as you progress through the back half.
What's the I don't know if its possible to sort of quantify what that headwind would look like and then the timing of when the productivity gains.
What offset that.
Yes first of all I would say that last quarter was fairly normal for inventory gains.
Below normal for core Mark.
We think it makes sense for us to call. These out we have always had them.
We've been very aggressive because of the inflation that's been out there and we've done a pretty good job of anticipating where these increases would come in carrying additional inventory. So I think we're in an unusual period for last year and for this year.
That's the only reason, we called those out but theyre part of I guess I would call it our quarterly life around here.
As far as the back half of the year.
The quarter that we're in now was very good last year higher than normal inventory gains Q.
Q4, a little more so.
And then Q1 of next year was when we peaked.
And as I've mentioned before those come from sequential.
Inflation, not really from inflation from the previous year and the sequential.
Deflation that we've had the last couple of quarters is whats kind of tempered that but we still made some some very good buys.
And then in the convenience area.
We have one that we did last year that we recognize the profit in Q2 that will be recognized in the profit.
Q3 this year.
As far as how.
Those who are going to affect our results. They are certainly built into the guidance that we give.
And we're in a little bit of a race here that.
During that period of time, where we had.
Additional inventory gains above and beyond normal. We also had very high operating expenses, particularly overtime and temporary health.
And those are dropping at a pretty good rate right now.
Unfortunately, not as fast as we would like to see it drop so.
Well that balance each other out I'm not sure, but we're not expecting that in our guidance for them to balance out we're expecting to have.
A couple of quarters at least where our inventory gains were not as good as last year, but I want to stress that it is in our guidance.
Great.
Just to follow up one on the guidance I mean, you have had a very nice beat in the first half of this year versus how you initially thought the year would play out.
Back half I guess, along the way.
Really kind of habit touched I'm, just kind of curious as to.
How you are thinking about the business now going forward versus sort of like what your initial expectations, but would have been.
I thought I heard you at the beginning of the call when you talked about the acceleration in January I.
I thought I heard a little bit of a ton of optimism I guess.
Moving forward.
So maybe you could sort of wrap that.
How you are.
I guess really feeling about the business now moving forward in the back half in EMEA as you progressed into the next fiscal year.
Yes, everything we hear concerning the macro can be confusing, but all in all.
The industry is not doing real great right now so we figured that.
We're better off to to be cautious about what kind of guidance, we give for the second half of the year.
A little bit to do with the inventory gains not as much.
January the thing about January .
And our industry certainly in our company.
As we've had really good januarys and just had average.
Q3s, and we've had bad January cycle last year and ended up actually with a good Q3, because about half of our earnings occur in March.
Yes, definitely an optimistic January very optimistic actually.
All of our businesses.
The first week of February if exclude the parts of the country that were really negatively impacted by weather also very good.
I look back at last year.
And it seemed to be that Valentines week, when we started to really improve and March was a fantastic month. So.
Much more difficult comparison so.
That's it in a nutshell and we're just we're just trying to make sure that debt.
<unk>.
Were given.
Guidance that.
We have a strong belief in.
Excellent. Thank you I appreciate it.
Thanks.
And we'll take our next question from Jake Bartlett with Trust Securities.
Great. Thanks for taking the question.
Mine was just on digging into the the strength that you've seen in January and just.
The underlying momentum of the business I am wondering whether you could frame that in terms of pre COVID-19.
Three years as I look at what you've reported for organic independent case growth there was a slight acceleration.
On the independent organic growth versus 19.
And so I'm just wondering whether you can whether that's accelerated I calculate roughly 20%.
Growth and so wondering whether whether it's actually accelerated in January just so we can take out the noise of BOMA.
That's why we mentioned earlier that we were encouraged by January I mean once again it's January .
But yes, there was an acceleration.
Over the fiscal 19 numbers it wasn't as extreme as the acceleration over fiscal <unk>.
<unk> two numbers.
And even our Q2, where we were slightly less than Q1 for independent growth.
We were ahead of it going into those last two weeks.
<unk> of the quarter.
Something that happens once every seven years and our business is that the holidays fell on a Sunday.
And it wipes out Saturday night, which is typically a very good night.
So even though I'm sure for restaurants.
Saturday night.
New year's Eve was real good, but Saturday nights, good whether it's new year's eve or not so we expected that it was probably a little bit.
More than the normal but it's just it's just one of those things that happens in our business. So we feel from Q1 to Q2 that we did have a slight acceleration between Q1 to Q2 versus the share numbers, we get we had a nice acceleration.
So.
I think when we look at kind of that three year stack I think is what youre referring to.
Fiscal 19 to fiscal 'twenty, three we feel excellent about that.
Great. That's really helpful. And then I'm wondering in terms of the sales guidance for the third quarter at the midpoint, it's a little bit down from the second quarter.
I look historically it looks at convenience hasnt seasonally weaker.
Third quarter I'm, just if you can frame whether that slight deceleration at the midpoint.
Is due to more seasonal factors or if that is reflecting.
Some of the challenges that you're seeing in the macro basis trying to kind of judge whether.
There is some kind of unusual deceleration there or whether it's just just more seasonal.
Yes, all of our businesses the third quarter's typically at the latest.
Revenue quarter.
Got it.
Also a big impact to us tobacco is really declining.
At a pretty heavy rate right now, which.
All in all is not a bad thing.
It's not a big margin producer, but it certainly has a big impact on the top line.
And I would say that's probably it.
Our national account growth, where I had mentioned I think it was two calls ago by fiscal third quarter, we'd be running growth I'm not so sure that's going to happen.
We've played out from account standpoint, exactly exactly as Lee.
<unk> had wanted it to go but there's real.
Softness in that account base, so thats, probably a little bit of it too.
Great. Thank you so much.
And we'll take our next question from John <unk> with Guggenheim.
So George I want to start with why do you think.
Independent case growth is less in new account growth right and within the context of that.
Your thoughts on salesperson bandwidth and capacity right, because they're doing a lot more volume than they did three years ago.
Where are we on that and do you think you need to grow the sales force faster too.
To see a pickup in independent case growth.
Well I think the biggest thing in the accounts.
Growing faster than the cases part of it may be we have I think we always have an emphasis on new business, but we've had a little bit more of one than typically because we're finding that at the customer level.
That.
We are doing on average less business than we were doing the previous year. This on average with our customer base and independent yet.
Yet, we're selling them slightly more skus than we used to sell them. So that just shows that the volume down at the account level.
Now January a lot of the improvement was new accounts. So we also had improvement in penetration within the accounts, we actually were positive in the month of January and that's why I think part of our increase has been due to the <unk> the previous year and as far as salespeople, we have made big investments in the <unk>.
Last couple of quarters.
I had mentioned before that we've kind of gotten behind right now our percentage increase in number of salespeople is the most we've had in several years.
Okay.
And maybe for Patrick.
Given your closeness with Vista right. So this store profitability at least in this period with several hundred basis points above right.
<unk> been running.
Your thoughts on the source of that and then where do you think it looked like it was settling in maybe 5% to 6% range, which was higher than pre COVID-19 is that still sort.
Where we are settling out or maybe it's it's higher than that now.
Now I'm going to go ahead and take that.
John just because needless to say <unk> been very busy the last quarter, Okay sure.
Sure.
Our return on sales of our EBITDA margins in this star has always been.
More volatile than than us as a company.
And I've explained this before but I think I should do in a little bit more detail.
We have parts of our business and this started that have very high case cost yes.
Yes, very low gross margin very low expense ratios and low EBITDA margins.
We have parts of our business that are low case cost.
Okay.
Our.
High margin.
They are high expense ratios and they are high EBITDA margins.
Then we have our pick and pack business, where there's a lot of aegis out of those particularly.
Particularly the three distribution centers totally dedicated to that.
And that is high.
Our high margin high expenses high EBITDA margins, then we have a fulfillment business.
Which.
We feel we're going to show some real growth in a couple of quarters with.
But there we do not.
Get involved in the accounts receivable on that product.
Fulfilling those orders.
Most often for the manufacturer or the.
The online site.
So all we're billing is our fee.
So.
There is extremely low.
Case cost average.
Almost all of it is margin.
So it has extremely high margins and then inventory gains can change quarter to quarter based on what kind of job. We did are anticipating increases in.
So there's a lot of volatility in there.
And Theres a lot of volatility in the EBITDA margins, but when it comes down to how we do as far as the percentage of the gross profit dollars that we put to the bottom line.
Pretty stable.
And John I don't see that changing.
Actually I would like to see.
Our fulfillment business became a much bigger part of our business.
Okay. Thank you.
Thank you.
And we will take our next question from Alex Slagle with Jefferies.
Thanks, Good morning.
Going up on the previous questions that the restaurant industry traffic seemingly still subdued I'm wondering if you could talk about your incremental efforts to drive an acceleration in new customer wins.
And independent business, what Youre doing to drive that does sound like ramping the sales force a little bit more.
Maybe any comments on how you're incentivizing your sales force or are there levers that drive further acceleration.
And that.
Yes.
We really.
We don't offer up.
Promotional activities that are national or or.
Things that we go to our people with it.
It's really all around growing our sales force and we've always found that if we're doing the right training and we're hiring the right people that we're going to grow our business faster than we grow our sales force.
And it's pretty simple, but that's how we look at it and I think that we've been able to hire some good people of late we got some intense training going on.
Lot of them have already been cut loose and we're ready to let them all cut loose.
I guess, it's just no different than that.
Got it.
And then just on productivity in your efforts around <unk>.
Matching our staffing levels to the volumes, which have been seemingly more volatile and hard to predict.
Just kind of seen it seen any opportunity for improved tools and our processes are.
You are working on to help drive better productivity here.
Hopefully the volume trends stabilize some more into February and March but any thoughts there.
Patrick's going to take that because he's much closer to what we're doing there yes, Alex thanks for the question so.
So first of all when we think about labor we've been really pleased it's been slow but it is improving.
When I think about what's going on in the field and our leadership in the field and how they are working every day on the hiring and retention and training of our warehouse and drivers again, we're really pleased with the progress we're making it's slow and it's slow because the one area that we want to continue to see more improvement is on retention.
But because of their success so far we really have seen the temp labor come.
Come out of the system for the most part and we're also seeing overtime reduced so as George mentioned earlier in his comments.
I think that while it may not match up perfectly but over the next several quarters. This is going to be it has been a headwind, but it will become a tailwind and help offset some of the comping that we're going to have to do with these inventory gains. So we do see this as a positive going forward and we're really pleased with the progress we've made today.
<unk>.
Great. Thank you.
And we'll take our next question from Mark Carden with UBS.
Good morning, Thanks, a lot for taking my question so to start it sounds like you guys made some really nice progress on fill rates.
Presumably on the inbound side, it's picked up a bit across the industry.
Even that have you seen any smaller competitors, taking any more aggressive efforts.
Maybe when Maximus shared that they might have given up on inbound bill rates are more challenging do you see that being much of a risk or has the new business that you've gained really just be pretty sticky.
I think that nothing has really changed from the competitive landscape. There is probably a little bit more activity going on as far as short term procuring of an account.
Picking up some business within account, but we've done some of that ourselves in the past and it seems to do exactly that it works pretty good short term and it doesn't have an impact long term. So we're just kind of continuing to to do business. The way, we do business and priced the way in which we price and we will.
We haven't seen any different and different in the marketplace.
Okay, Great and then as a follow up it sounds like overall, so nice progress on new business good market share gains overall, how about from a category perspective are you still seeing strength really across the board and independence.
So any categories in particular stand out just what youre seeing on that front.
Yeah.
Casual dining obviously the change.
I have looked at <unk> numbers not doing real great.
But the casual dining independent seems to be doing really well and thats been.
A good part of our growth.
Pizza has definitely.
Slowed down in the last year.
But we're continuing to gain share.
Very excited about that business Hispanic seems to be doing.
Well, although we don't play hugely in fine dining fine dining seems to be doing well.
Bob.
And center of the plate center of the plate has been has been a big hit for US I mean, our margin growth has really been around our change in mix just in and mix of customers mix within our channels, but product mix has been a big contributor to that to some of our highest.
<unk> per case items had been where our growth has been good.
Thanks, so much good luck.
Thanks.
And we will take our next question from Brian <unk> with Morgan Stanley .
Yes. Good morning, Thank you.
Is there any way youre able to quantify kind of the impact of some of the business that you said you had exited.
And then just kind of to the point you just made was as the softness more on the casual dining side that you've seen.
And the most recent quarter or anything else that you would call out there.
Yes, I would say to answer your last question I would say a casual dining is where we're seeing the most slowness as.
As far as exited business.
I think theres different ways to look at that word it's extraordinarily rare for us to tell a customer we don't want to do business with them anymore very very rare.
By exited we've gone and we've had to get a higher price to be able to handle that business and in some instances the customer isn't willing to do that and we've been in a position and I've mentioned this probably this is probably the third call, but maybe.
Too much but.
When you have excessive overtime and you have an excessive amount of people who are temporary.
You can have business that's typically.
Maybe marginally profitable with good return on capital that becomes unprofitable.
And that's the position we were in.
We just didnt.
Pursue some business as heavily as we would in the past.
We synchrony getting there where maybe we can be a little bit more aggressive.
But.
It's.
Theres still a high costs that we're dealing with.
They have.
I guess to bring on business that is going to be difficult to grow if they're not growing.
That's why I've seen some real flatness or declines in our national account business.
And our focus is just I mean, we like those type of business and we like all businesses, we'd like those customers but.
For us our focus has had to be really really heavily on independent and I will also say that.
We've also had core mark growing at mid teens and their non tobacco business and that's been a nice contributor for us for growth.
Yes that makes sense, okay, and could you remind us where just kind of your owned brands.
Penetration is and how that's kind of driven some of the margin performance that you've seen recently.
That's one of the best things, we have gone for us right now.
We just finished a month, where it was 51, 9% of our independent business.
And it's just not a number that quite frankly, I expected us to get to so.
So it's been really good and almost I mean really close to all of our branded business goes to independent.
Restaurant tours, so we're real focused on that.
It's doing well customers seem to receive it well.
Thank you.
We will take our next question from Jeffrey Bernstein with Barclays.
Great. Thank you.
George you mentioned in your prepared remarks.
A more stable landscape to start calendar 'twenty three.
Thank you alluded to it being beyond just the favorable January compare bounce.
And yet you've also noted that the industry not doing really well right now so I was trying to just contextualize.
It sounds like most of the chains, we talk to are talking about surprising resilience in the business and the consumer and whatnot. So I'm just trying to.
Bifurcate between the more stable landscape relative to the <unk>.
Industry, not really doing well right now and then I have one follow up.
Yes, what we get from third parties showed that the industries and a very very slow Taco night, not single digit single point growth.
I get the same conflicting things Jeff.
We have changed that are doing really well and are excited.
<unk>.
I don't know there is a downturn going on and we have some that are really struggling.
And I think it's that mixed bag.
And one of the reasons.
I guess, if we use the word stable is that.
We are been in this period of time, where we've had.
Single digit.
Lost business and Thats something that we always had as a goal and could never quite get to.
So thats accounts that we.
So last year and don't sell this year. So they went out of business that we lost the business for something happened.
And Thats a stability that we haven't had in our company to that degree before.
That's where that where it comes from I guess.
Understood.
And then just on the.
The commodity inflation or less of it.
It sounds like Youre expecting continued easing.
Wondering where you think that goes whether we will be talking about low mid single digit inflation over the next quarter or two.
Thoughts on whether or not that could turn to the deflation in a most have not.
Consider that that was really very likely but just wondering how you would change how you manage your business differently if that inflation.
He's more quickly and actually turned to deflation. Thank you.
Yeah well.
Where are we still have.
Fairly high inflation and just are still.
And core mark not as much but some inflation, we don't concern ourselves with deflation there because.
They typically raised their price and the same pattern all the time and they fight hard to get their prices increases in.
And.
You just don't see them back off.
So I think thats stable they may skip some price increases or something like that certainly could happen, but deflation now.
In our foodservice business, particularly our independent Thats, what we really watch the closest.
Right now, we're seeing our case growth.
And our.
Pricing.
Almost converging.
So.
And Thats real recent so that doesn't mean that there can't be something within our mix that we will see as we do our inflation numbers at <unk>.
At the end of the quarter.
But.
I think that inflation is right now appears to be headed in our independent foodservice business for very low single digit.
And as far as.
Inflation I think we're set up to handle deflation I think we're set up to handle that well.
We didn't handle it so well when it happened back in the great recession.
We've got some good systems in place.
The more experienced sales force, we feel fine with it.
Yeah.
Understood. Thank you.
Thanks.
We'll take our next question from Kelly Bania with BMO capital.
Yes.
Good morning, Thanks for taking our question.
Hi, George I wanted to go back to something you said at ICR.
About the comment about renegotiating.
Terms with most customers I think almost every customer and I believe that on the call.
Contract side, and and Thats pretty consistent with what we hear across the board.
If you can help us understand the changes in the <unk>.
Way that the contracts are structured and negotiated today versus maybe a few years ago and how that may impact.
The future of how the business performs in the future and I guess I'm, particularly curious if theres any.
Changes are ways that we should be modeling as we transition here from this high.
Higher inflationary environment.
Lower inflationary environment.
Yes.
At least within our world that there is really any changes in how they're structured.
We just needed to get most of that is a fee business, we needed to get a higher fee.
Because of our expenses.
We tried to do a good job.
Of making sure that we're recouping.
What we felt were kind.
Kind of those long term expenses obviously.
The operating.
And expenses that we had through the severe part of Covid is not something that you.
Pass onto a customer you're just going to cause you self problems down the road.
But we were fairly successful I would say very successful we have a good customer base.
And where we Werent successful we lost some business.
That's just the way it goes but no I just don't see a big change.
Moving forward and as if we go through a deflationary period of time those customers will benefit.
From lower cost probably in the end be good for our business good for our industry.
Okay. That's helpful and maybe just to follow up on fill rates very helpful color.
There I think you gave us.
With that let's start just curious if you have a sense of how you think those.
Payable on the inbound and outbound metrics.
For the rest of the industry and your competition.
We don't have a good feel with that I mean, I guess, the only thing that we get is.
The complaints from customers around fill rates.
Gone down and we've gone down a lot.
Our foodservice, we're almost back to normal very close.
Core market just are still struggling more with inbound.
And what I look at because it's hard to judge in this type of environment has been hard to judge as what our inbound rate is versus our outbound and are we converting the inbound to a better outbound at kind of a percentage standpoint, what we used to when the when the supply.
Change was normal and we've been able to do real well there. So I would say that we're probably at least.
At least at par with the industry.
Think it helps to that.
We are purchasing people at each of the distribution centers, they're really tight tight to the sales force in many.
Many of the customers, particularly the larger customers and I think that's helped us.
Thank you.
We'll take our next question from Lauren Silberman with credit Suisse.
And it looks like they have.
Sales from the queue, we will take our next question from Andrew Wolf with CLK.
Thank you good morning, I just wanted to ask you to perhaps tell us a little more about your views and outlook on labor productivity. So what I've heard from what <unk> been saying George sounds like labor costs.
They are coming down.
Maybe on an hourly rate as you substitute in sort of normal labor for some of the expensive labor you have had to beer.
But wanted to see what are the trends looking like with labor productivity given it sounds like you might be early on still training people and what is the outlook for labor productivity.
And where does it need to improve or is it more of a it sounds like it might be more of a still a warehouse.
Issue than a delivery, which sounds like its improving more rapidly.
Well it needs to improve everywhere, but I'm going to I'm going to kick that one to Pat he's closer to it.
Yes.
Good question as we've talked about a little bit earlier.
I will expand upon my previous answers just we have some great systems in place.
So once we get people into the warehouse once they're trained.
We have great systems, allowing them to be very product.
Have very efficient productivity.
What I mentioned earlier, it's a retention thing and this is I think.
PFG issue, it's a broader industry issue, but.
We are starting to see some really nice progress.
I mentioned earlier so the team is doing an excellent job of recruiting and getting those folks.
Into the buildings getting them trained and again, we think that over time. This is really going to become more of a tailwind.
And.
Sort of as you know everybody has until recently been using 2019 are actually still using 2019 as a metric.
If you look at sales productivity or you're also doing that.
Some kind of pre COVID-19 normal for labor productivity.
And.
Can you give us a sense of how that curve is going to look in terms of the improvement over the next year.
Yes, I mean, we absolutely look at pre Covid numbers as well just to make sure that we're measuring to what was what we'll call a sense of normal back then and then how does that compare to today I can't give you any indication of how quickly we will move down that curve because again, it's just there's so much uncertainty.
Around labor, but it's.
It's something we're very focused on I can tell you that.
Okay. Thank you that's it for me.
Okay.
And we'll take our next question from William Bremer with Bank of America.
Yes.
Good morning.
The sequential commentary about your inventory gains over the last year, and which are the toughest comps was very helpful.
I was wondering if you could share the magnitude and totality of these gains on an LTM basis, because it sounds like you think that largely these are going to be offset with productivity savings. So trying to get a sense for what youre expecting on that.
Yeah. This is patrik again, so again, just going back a little bit we started to see these inventory gains and <unk> 22, and then they stepped up and <unk> 22, and then again in first quarter of 2003, and then as Georgia is mentioning in this quarter, we actually saw.
Year over year gains.
We were comping negative so.
We can't really quantify with you today about what totality of that is right and as George mentioned, we not even sure that.
The productivity gains that we will see will completely timing wise offset these inventory gains, but we're both there is a lot of opportunity on the productivity side and we had in our outlook.
Said that we anticipate inflation to continue to decelerate and then we will see these inventory.
Comps get tougher, but again all of that's baked into our guidance.
Okay and then.
<unk> been focused on debt reduction of late.
Leverage is now kind of within your target range.
Are you at the point, where you would look at additional M&A or do the higher interest rates.
In the current environment kind of discourage this activity.
Well, yes, as you mentioned, we are within our leverage range and we're obviously very happy about that and again, we reduced our leverage to three three in the quarter.
When we think about our uses of cash or certainly as I mentioned focus mostly on investing in the business and building our capacity to support the growth of the business and we're always looking at strategic M&A.
I'll leave it there unless George wants to add anything to that.
Well, we've always been opportunistic opportunistic acquirers.
Hi.
I would say that we always will be.
So that something could happen there we don't have anything that's actionable right now.
But paying down debt.
It's important to us.
So as adding capacity.
We would rather reduce.
Our <unk>.
Leverage by having more earnings as opposed to.
Yeah.
Reducing.
Anything for that matter, we want to grow and physical capacity I would say that's probably the most important thing to us today, but will always be an opportunistic acquirer.
Great. That's all for me thank you.
Thank you and we'll take our next question from Joshua Long with Stephens, Inc.
Great. Thank you for taking my question I'm curious if we could talk about just the overall strength of the supply chain. It seems like things would be improving you mentioned a couple of times different.
Movements in fill rates overall, but just curious if you could contextualize just the overall strength of the supply chain and then when we specifically talk about some of the spill rate comments.
How do you think about that.
Although the fill rate percentages up what does that look like in terms of the number of items are kind of the assortment versus kind of pre pandemic and is that even.
An important point kind of in the current environment.
That's a good question.
Think the supply chain is strengthening pretty quickly right now I think we learned a lot going through COVID-19.
It was a fine tuned supply chain, particularly when you got to to perishable product.
And when something that that is that fine tune gets disrupted.
It gets disrupted overnight and it takes a long time to correct.
As I said, our foodservice is getting pretty close to normal.
One of the issues with our fill rate and fifth star and inconvenience.
Many items just werent produced any longer.
And the customer continues to order it.
And we're seeing many of those items come back online.
We're also seeing that.
Suppliers that were.
In both the retail and foodservice business and maybe.
Bigger than retail.
They had all they could do to pack the product.
Really.
Discontinued many foodservice items.
<unk> didn't have the level of attention to it.
And as a percentage of the food being eaten as has.
Swung back greater and greater towards foodservice, we're seeing those people come back online I will say, it's hard to.
It's hard to go running back when you've had to find other sources, but they are coming back.
I would call the supply chain is something thats not there yet, but we're seeing really good improvement.
That's helpful and then number two items by the way that's something that we follow real close by distribution centers the number of items that they sell.
On a weekly basis and most of our companies are still selling less items to availability, but it's improving at a pretty quick right.
That's helpful. Thank you for that.
Maybe bigger picture when we think about just contextualize the holistic strength of the business.
In terms of case growth New company new.
Customer wins and add.
I imagine there is also a good bit of investment that happens behind the scenes in terms of capacity warehouse not just in the on the Salesforce side can you talk about that and maybe where how you feel like you're positioned to sustain or support continued growth at these levels going forward.
Yes.
That's a good question and as we talked about just the on the last six months, we've invested $98 million in Capex and and when we talk about our priorities.
Is really the number one priority is to continue to invest in the capacity of the business to help it grow.
Just mentioned another priority has also reduced leverage but the number one use of our cash is going to be continuing to invest in the business and.
Given the results of the three segments and their strength, we're going to continue to do that because they're doing some really nice job of generating some really solid growth.
Thank you.
We will take our next question from Carla Casella with JP Morgan.
Hi, Thanks, It's Carla Casella from Jpmorgan you May go.
Good progress paying down revolver. This quarter I'm, just wondering if theres any contemplated in your annual kind of leverage in <unk>.
Targets going forward is there any thought that you could be out of that facility by year end or a target of where you wanted to be out of that facility kind of given the high cost of Reits today.
Yes.
Thank you for asking it because theres a couple of things I wanted to share as we mentioned in our comments.
Because we use interest rate swaps. There is a portion of the ABL that is floating but because we use swaps 76% of our total debt is fixed and the ABL is at a very attractive rate of LIBOR plus 125 bps.
So yes interest rates are certainly going up and we're watching that very closely and the portion of our ABL that is floating does move up accordingly.
But we've done a really good job of managing that interest expense. So there is no expectation at this time that we would be looking to retire that facility and.
And we'll just continue to manage the interest rate environment. The best we can with those swaps.
Okay, great. Thanks.
We'll take our next question from Peter <unk> with BT.
Yes.
Great. Thanks for taking the question.
I wanted to come back to the conversation on the.
The foodservice and the restaurant space.
George you mentioned that pizza has slowed in the past year, yet fine dining is still doing pretty well.
Do you feel like this is.
The lower income consumer kind of pulling back just just theres been a lot of conversation and concern around that in the industry.
Wondering your thoughts on on the consumer.
That environment.
Yeah.
That's a hard one.
No.
<unk> appears to be doing quite well, we do very little of it.
Here's to be doing quite well.
I think with Pizza I think that as there's been more options for the consumer.
Consume less pizza I think there was or the term pizza fatigue.
There was.
They did so well through the Covid period of time.
I probably don't have.
A real good answer for you on that.
<unk>.
I guess.
A way to put is lower end consumer.
We too.
A lot of value store business out of this star and.
That business is doing well and we would probably be doing a lot better if there was more product availability.
So that is a sign that people are.
Kind of going down the chain a little bit so I.
I would guess I would call it mixed.
I appreciate that I'm, just just a housekeeping.
Question here I think you mentioned foodservice inflation was about nine 6% can you gives us that number what it was last year at this time and maybe on a three year basis that would be helpful. Thanks.
Yes, we don't have that number we can get it in and have bill get that to you, but I would want to comment that.
That was what we did last quarter and we have seen.
Pretty significant deceleration.
In the last five weeks since the end of that quarter and foodservice.
Thank you.
We will take our next question Fred Wightman with Wolfe Research.
Hey, guys. Thanks for the question I just wanted to come back to some of the cost benefits that you guys highlighted from the lower temporary workers and overtime. If we go back and look at some of the prior disclosures that you've provided about some of those onetime costs, where those numbers only the temporary labor force or was that the combination of the temp labor force and the higher.
Overtime.
Yes, Thanks Patrick.
Those comments those prior comments are really around the temp Labor force and we were just highlighting that because they are unusual.
Okay and then this we just think about the sequencing of those potential benefits going forward. If we look in for Q of last year, you guys had started highlighting year over year benefits from lower temp workers. So how does that sort of piece together with the ability for some of these lower costs to offset some of those inventory gain.
<unk>.
Or the headwinds from lower inventory gains that you are facing here for the rest of the year.
Yes, I think the best way of thinking about it is I think we have said that a lot of that can flavor has come out of this system. What we're focusing mostly now on AC overtime that we still have in the system, which is again, just a function of us being able to hire enough workers and retain those workers.
The productivity improvement that we are still really looking to see the biggest benefit from is the efficiency that you gain once you've had.
Employee.
And the role for a little bit of time, and they really start to generate some.
Good efficiencies in that role so that's the next step and that's what we're looking towards.
Perfect and then just lastly, you touched on the private label penetration in independent specifically, but what is the outlook for that penetration just given using inflation and then also some of the higher fill rates that youre seeing from your vendors do you think that will hold steady can it continue to grow or maybe you guys are not.
Penetrating that because of costs, what is driving that I guess.
Yes, that's a good question, but a hard question.
We have.
A handful of Opco, who are in the 60% or over 60% low <unk>. So I guess I could say that that's a possibility.
But I will admit that I didn't see us being at 51 nine now.
One of the things that has definitely helped us.
We keep track of our inbound fill rate for our brands and our total inbound fill rate and our inbound fill rate was significantly better all the way through COVID-19 on our brands are our suppliers really stepped up so as the other suppliers have better fill rates.
That affected and I got to tell you I really don't know I think what I would say to you is that.
Im really pleased with.
The percentage of our business.
That's our brand.
Certainly like selling product that isn't our brand as well and.
That can be quite profitable for us.
Yeah.
You kind of develop a better sense of loyalty, but its the customer that matters, but.
When they provide you much better inbound service and then I guess the other guy.
I think it's going to continue to grow for us I don't know that we'll have kind of the outsized growth that we've had the last few years.
Makes sense, thanks, a lot.
And we'll take our last question from Lauren Silberman with credit Suisse.
Thank you.
So just a follow up on the foodservice and please ask a different way in your total cost basis, staying relatively steady while year over year is moderating or are you seeing that total cost basis declining as well.
It's moderating it's not.
<unk>.
Still elevated but it's really moderating.
Okay got it and then just a follow up on the independent customers.
No other than new customer acquisition, and that's really the focus area and how much how important is new restaurant opening for your customer acquisition goals or is there really enough opportunity in large amount of capital Mark and relationship that you don't have currently.
Matt.
Year over year positive unit growth in the restaurant space and then as important.
Yes, we don't track that unfortunately, probably should.
I think it's probably been new customers has probably been more important than the last.
Year certainly as.
You think about these buildings for the most part single purpose buildings and if somebody went out of business.
It would be rare to see somebody other than another restaurant come into that building. So I would say, it's probably been more important than the last year, but.
The rate at which you really need to grow your new customers too.
To put the growth out that you need you have to get existing rep.
The restaurants on board I think that's really important I wish I had better numbers for you, but we just don't track it separately.
Thank you very much.
Thanks.
It appears that we have no further questions at this time I will now turn the program back over to Bill Marshall for any additional or closing remarks.
Thank you for joining our call today, if you have any follow up questions. Please contact us at Investor Relations.
That concludes today's teleconference. Thank you for your participation you may now.
<unk> connect.
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