Q3 2023 Performance Food Group Co Earnings Call
Morning, everyone and thank you for joining our call today I'm excited to speak to you today about our fiscal third quarter results and outlook for the remainder of the fiscal year. Once again, our organization executed at a high level producing strong financial results.
Sales growth and high quality channels and disciplined cost control drove double digit profit growth and very strong cash flow in the quarter.
This allows us to invest behind growth initiatives and pay down debt preparing us for the future and improving an already strong balance sheet position.
In June we laid out three key strategic priorities consistent profitable topline growth adjusted EBITDA margin expansion and leverage reduction I am pleased with how our organization has internalized these initiatives and made rapid progress on all three.
We are achieving these goals with contributions from each of our three reportable segments in a moment I will highlight the success of each of these units and discuss why we believe we are well positioned to grow our business and deliver significant shareholder value over the long term.
As you saw in our press release this morning, our adjusted EBITDA in the fiscal third quarter was once again ahead of our guidance as a result, we are raising and tightening our adjusted EBITDA guidance range for the full year in a moment Patrick will provide additional details on our financial performance and outlook.
Our financial success in the fiscal third quarter was achieved despite decelerating inflation in the foodservice business over the long term, we believe normalized inflation is healthy for our company, our customers and consumers and look forward to a period of stable low single digit inflation.
This will bring that to market to a more typical operating condition in the meantime, we have been able to offset a lower inflation benefit through market share gains within highly profitable channels rapid growth and high margin products and disciplined cost controls.
We were very pleased to see our organic volume growth accelerate in the fiscal third quarter. This reflects strong market share gains in the independent restaurant channel solid growth at <unk>, and consistent progress selling food and foodservice into the convenience channel.
It is not a coincidence that each of these areas are also where we generate the highest returns breast profit margins and significantly significant operating cash flow. There are several factors, helping our improved volume performance.
In addition to our typical best in class sales and service levels to customers. We continue to see a tailwind from improving inbound and outbound fill rates, particularly at the store and convenience foodservice fill rates are essentially back to normalized pre pandemic levels accelerates at this start and convenience continue their steady.
March forward, we would expect it to support further volume gains let's review several highlights from each of our reportable segments and then it will provide my thoughts on the current environment.
As I mentioned earlier, we were very pleased with the progress in our case growth during the fiscal third quarter and foodservice. This was led by our independent business, which saw organic case growth of eight 3% year over year.
Some of the outperformance was certainly due to the benefit of an easier comparison due to the omicron impact early in the third quarter of last year. However, we were encouraged by the resiliency of independent case.
Case growth in March when comparisons were much more difficult.
As we discussed in the past few earnings calls our independent case growth has been driven by new accounts more so than increased penetration in existing accounts. This trend continued to a large extent in the fiscal third quarter, though we did see an increase in cases per account year over year with that said new account growth.
Was even faster in the fiscal third quarter than it had been in the prior two quarters and was just behind total case growth.
Rapid growth in total new accounts, coupled with year over year increases in cases per account.
B a strong combination for our case growth in future periods.
This is also reflected in our market share momentum, which remains robust our daughter shows consistent market share improvement in the independent channel both on a case and dollar basis. As you know, we define an independent restaurant and as an operator with fewer than five locations. We have remained consistent and this stephanie.
Mission.
We are very pleased with the progress the foodservice team has made with our independent restaurant business, which goes beyond the headline case growth numbers and include solid factors underpinning that growth, which we believe will produce long term gains. This is not only profitable to our bottom line, but good for the long term positioning of our foodservice.
<unk>.
Moving to this started this segment has continued to perform well over the past several quarters. The third fiscal quarter of 2023 was no exception as Vista reported nice revenue gains in adjusted EBITDA growth versus the prior year period.
This star success was broad based with double digit case growth in vending office coffee theater and concessions. There are several factors driving this success, including continued recovery in several of these channels as consumers increasingly revert to their pre pandemic behaviors. We're also seeing a nice lift from <unk>.
<unk> fill rates as I mentioned in my earlier remarks. This is encouraging as the benefit is already being recognized despite fill rates still below historic levels as the supply chain moves closer and closer to healthy fill rates. We expect the case in dollar sales lift persist.
<unk> is an important growth area for PFG, not only contributing to our sales momentum, but also accretive to our profit margins and returns. We are optimistic that Vista will benefit from the combination of continued channel recovery and organic growth into existing channels, along with entry into new channels.
Our push into the convenience channel continues unabated with another quarter of double digit foodservice sales growth. We are particularly pleased with the pace of profit growth in convenience driven by strong results from higher margin products, along with like for like margin improvement across both nicotine and non nicotine.
Businesses.
As we've discussed with you in the past the sales cycle for the convenience business tends to be long. However, we have a stable pipeline of new business opportunities, which we expect to drive sales and profit growth over the long term and produce nice shareholder returns on our investment in core Mark.
Before turning it over to Patrick who will provide additional detail on our financial results I wanted to briefly discuss the recent inflation trends.
As expected we have seen inflation rates move lower month by month on a consolidated basis. The pace of Disinflation has been roughly in line with our model, which is the basis for our guidance. However, there has been divergence segment by segment inflation.
Inflation in foodservice has fallen quicker than anticipated while this store and convenience have continued to experience persistently elevated year over year inflation rates.
We feel very comfortable with our businesses ability to manage through the environment demonstrated by our strong third quarter results overtime, we would expect foodservice inflation rates to stabilize in a more normal low single digit range with this store and convenience inflation rates beginning to move lower over the next few quarters.
In summary, all three of our reportable segments had an excellent start to the calendar year, finishing our fiscal third quarter with strong volume momentum favorable profit mix and tight cost controls. This led to a strong bottom line result, very solid cash flow generation and continued progress fortifying.
Our balance sheet I will now turn the call over to Patrick who will provide additional detail on our financial performance and outlook for the future Patrick.
Thank you George and good morning, everyone as George discussed we had an outstanding fiscal third quarter, making progress on our three main objectives and putting our business in a position to drive shareholder value over the long term once again, our adjusted EBITDA results came in above our guidance, resulting from better than anticipated gross profit performance.
Tight operating cost controls as.
As a result, we are raising and tightening our full year adjusted EBITDA guidance range I will walk through our guidance in more detail shortly.
Also very pleased with our organization's ability to convert these profit results into cash flow operating cash flow generation provides us the flexibility to invest behind value, creating growth projects, which we believe will produce sustainable revenue growth in the years ahead.
Meanwhile, we have used our excess free cash flow to reduce our outstanding debt on our ABL revolving credit facility that coupled with our adjusted EBITDA growth moved our leverage to the midpoint of our target range of <unk>.
A few specifics on our cash flow and leverage.
Through the first nine months of fiscal 2023, PFG generate $657 2 million of operating cash flow.
After accounting for $177 million of capital expenditures PFG generated $480 million of free cash flow over the past nine months. We are very pleased with this cash flow result, which reflects strong cash generation during the fiscal third quarter.
Our operating and free cash flow is up significantly compared to the prior year in both the three and nine month periods. This is a testament to our strong underlying fundamentals along with disciplined working capital management.
We have also stepped up our capital expenditures to match, the current and future growth prospects of our organization much of the spending goes towards building new capacity to support long term growth across all three reportable segments. These facilities are equipped with updated equipment and technology, making our business more efficient in addition to <unk>.
Supporting our rapid growth.
Over the past nine months, we've paid down our ABL facility by about $380 million as a result at the end of the third quarter. Our leverage ratio was 3.0 times net debt to adjusted EBITDA on a trailing 12 month basis.
Leverages now right at the midpoint of our two and a half to three five times target range.
At the end of our fiscal third quarter about 79% of our outstanding debt was at a fixed rate, including swaps. We have in place against a portion of our floating rate ABL facility.
We believe this is a very healthy position, particularly given the interest rate environment. Today, we expect to continue to manage our leverage within our target range, while keeping optionality for potential M&A and other value creating activities.
I want to take a moment update you on our digital ordering platform customer first as a reminder, customer first is our new digital platform designed to provide customers across our businesses with a better online ordering experience. We have made significant progress in the rollout at this time, 90% of foodservice locations.
Or in some stage of deployment and 100% Avista locations have access to customer first.
We expect this platform to result in increased order sizes improved customer retention and generate new business wins. It also leverages the entire PFG platform is expected to generate cross selling opportunities feed.
Feedback from the customers using the platform has been very positive and we continue to convert accounts.
PFG has expertise across food away from home channels and customer first allows our organization to unleash that potential.
Excited about the progress we have made I expect much more to come.
With that let's quickly review some highlights from our fiscal third quarter.
<unk> total company net sales increased 5% in the third quarter to $13 8 billion. Our net sales performance was driven by strong case growth somewhat impacted by lower levels of year over year inflation in foodservice.
Total organic case volume increased three 1% in the third quarter driven by growth of independent restaurants performance brands as well as gains invest or our total case growth with an acceleration from the prior two quarters. Our organic cases were flat for the total company year over year.
Okay.
Organic independent cases were up eight 3% in the fiscal third quarter again, an acceleration from the prior two quarters when organic independent case growth within the mid 4% range.
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 12% compared to the prior year quarter.
Gross profit per case was up about 55 in the third quarter compared to the prior year period.
In the third quarter <unk> reported net income of $80 3 million and adjusted EBITDA increased 32% to nearly $315 million.
Inflation continues to impact our business and continued to moderate due to lower year over year inflation in the foodservice segment.
Total company cost inflation was seven 2% in the quarter.
This was the first period with single digit inflation since the first fiscal quarter of 2022.
The deceleration was driven by our foodservice segment, which experienced three 5% inflation in the fiscal third quarter.
Fifth our inflation remained at the mid teen level in the quarter, while convenience experienced another quarter with inflation just above 10% once again inflation for both <unk> and convenience, we're very similar to what they experienced in the prior two quarters.
As George mentioned, we continue to expect lower levels of inflation through the remainder of fiscal 2023, which is the assumption embedded in our outlook.
As we've discussed on prior calls decelerating inflation produces a short term headwind from inventory holding gains in the fiscal fourth quarter of 2023, and the fiscal first quarter of 2024 holding gain comparisons will be elevated.
With that said our track record of offsetting this impact over the prior two quarters.
This confidence in our ability to manage through it once we reach fiscal second quarter of 2024, the comparisons ease substantially.
Total company third quarter, adjusted EBITDA margins increased 47 basis points compared to the prior year period, we remain very pleased with our ongoing margin improvement demonstrating our organization's commitment to strong profit results despite challenges related to lower levels of inflation.
Diluted earnings per share was 51 in the third quarter and adjusted diluted earnings per share was <unk> 83.
As you saw in our earnings release, we have tightened our full year 2023 revenue outlook and raised and tightened our full year adjusted EBITDA range.
For the full year, we now anticipate net sales in the range of 57% to 57 5 billion.
This range incorporates our strong case growth momentum somewhat offset by lower levels of year over year inflation.
Adjusted EBITDA now is anticipated to be in the range of $1 34 to $1 36 billion, an increase from our prior $127 billion to $135 billion range. This 2023 expectations keeps us on track to achieve our three year fiscal 2025 targets, we set at our <unk>.
June Investor Day.
To wrap up we are very encouraged by our third quarter results, which saw continued progress on our three focus areas sustained profitable sales growth adjusted.
<unk> EBITDA margin expansion and lower leverage despite challenges in the external environment.
We generate significant operating and free cash flow, which allowed us to pay down debt and move to the mid point of our leverage target range.
Our organization is executing our strategy and we believe 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.
Move yourself from the queue at any time by pressing star. Thank you. Once again that is star and wanted to we would like to ask a question.
We will take our first question from John Heimbach <unk> with Guggenheim Securities. Your line is now open.
George I want to start with the sales force right.
And the share gains.
I think you disclosed at Cagny right sales force growth is into the low double digits.
Which I don't think we've ever seen before so maybe talk about that effort.
Do you think that industry demand softens from here and then does that sort of gives you confidence that because of what you've done with sales.
Can sustain let's say.
Mid single digit or better growth in independent cases, even even in a slowdown.
Yes.
Quite confident in adding the salespeople I think was a big key for us.
We've been real consistent on our increase in customers over the previous year all through this year.
6% to 7% is about where we've been running.
And we've had inconsistent month to months.
Sales growth so the way we look at it is that.
We're in a pretty consistent mode right now.
And.
The variability that we have kind of week to week month to month and sales growth is all macro.
And if you look at the quarter that we just finished we had.
Extremely strong January because of light comparisons too.
Crime.
February certainly not as good as January built good it softened some in March.
I think that was some cabin fever last year and just a real strong March last year, but that consistency is the 6% to 7% growth in number of customers held to all the way through that period of time. We've also seen that so far in this quarter.
We have kind of an odd.
Calendar mismatch, where last year, we had cinco de Mayo, which is real big for us and mother's day, which of course is big the same week.
Last year so.
This week that we're in right now we're running unusually high growth, but I think it's just because.
We're up against the week after mothers day, and we have mother's day. So it's hard to comment on this quarter, but the consistency is around that continued increase in number of customers and our hope is that that number continues to.
Kind of be stable, where it's at now and.
And I think we're headed for maybe more normal macro market and we should be able to match that customer growth with case growth.
Okay.
And then maybe a follow up to that right. So.
One of the things that has to happen here I think.
As inflation moderates in the topline moderates labor productivity has got a pickup in the labor drag has to get better.
Yes, some of that so I guess natural but where are we on that process and do you think we're at a point here where.
Labor productivity to get substantially better in the next three to six months.
I think it will continue to get better I don't know that we'll get back to pre COVID-19 numbers or not we're certainly not there yet, but it does get better and it gets better on a very consistent basis.
For us we've had kind of a law. If you look at it we really had a lull in case growth for normally where we're at and that's because of our national account business continues.
To be negative from a case growth standpoint, and I think it gave us some time.
Two.
Get stable get our workforce more stable.
We feel like we're positioned.
To continue to get better productivity and.
Hopefully with that get get better growth as well.
With the labor market is improving.
And it is improving.
Yes, it is okay.
Yes.
We will take our next question from Edward Kelly with Wells Fargo. Your line is now open.
Hi, good morning, guys nice quarter.
I wanted to start on on gross profit per case.
Up 55.
It is still very impressive despite lapping inventory gains.
Like actually in foodservice it seems like there's some maybe sequential deflation.
So its service I was just hoping that you could unpack. The drivers of this is there is there still any unusual inventory gain running through this because I know you always have some inventory being somebody's business, but what you would classify as an unusual and then how are you thinking about the outlook for gross profit per case.
In the coming quarters against all of this.
Yes, the inventory gains.
Last year in fiscal Q3, we had a very good quarter for inventory gains we made some wise buys.
<unk> was particularly in convenience and vis star.
We were able to overcome that through just increased gross profit per case and some growth.
That number gets bigger in Q4.
And then in Q1 of next year is when it peaks and then it normalizes after that so.
We're cautious around those quarters because of the amount of those gains but of course the quarter that we just finished gives us a lot of confidence going into that.
We will have somewhat of a.
When I think.
When we get our budget together in our guidance together for the August call, we'll probably percent something that looks a bit like a hockey stick where this year, we were a reverse hockey stick.
But we look at where we sit today and we have a lot of long term confidence as far as gross profit per case goes.
A lot of our increase in gross profit per case is mix related.
Both.
Channel mix and customer mix anytime we have our independent growing at.
Such a significant amount more than our national account business, we're going to increase our gross profit per case.
And.
This star that Dave.
They've just been real consistent with that increase and then we have that fulfillment business, where we don't have.
The revenues are we have is that gross profit per case and that has some unusual effects swing.
On the business, but for the most part positive I don't see a great deal of upside in our gross profit per case, I think that our profit per case will get better as we see better productivity, but we've made some significant gains there.
I don't see this.
$50 55.
Gains per case as we get into next year.
That's helpful. I guess, maybe just a follow up to that George you reiterate the fiscal 'twenty five outlook today.
I think investors are kind of taking a step back and theyre looking at what they think is some slowing in industry demand.
A pretty sharp slowdown of inflation trends.
And your outlook implies about maybe at the midpoint, 8% kind of EBITDA growth over the next couple of years and I think there's some concern in the ability to achieve that against that backdrop can you just maybe talk about your confidence in the ability to do that and I know, it's probably on 24, but is there.
Any like 25 waiting to that.
Just any any thoughts that you can provide.
Maybe to give investors a little bit of comfort around that well, we feel we're trying to be pretty cautious around the macro.
I would I would call us confident around that the range that we've given today.
Yes. It was just something really unusual from from a macro standpoint.
We've got a real good sales funnel.
As we mentioned.
The convenience area, it's a long sales cycle.
We have a particularly good funnel there.
We've been fairly quiet as far as.
Pursuing national account type of business.
And we'll be a little bit more aggressive there now that we feel like we've got our arms around the labor and we have a pretty good idea of what our cost structure is going to look like moving forward.
And we're hopeful that we can get.
There anything large from an M&A standpoint that we're looking at right now, but we're hoping that we can get a little bit of M&A in there as well. So all of those things put together I think we're pretty confident you might want to comment on that too.
I'll just jump in I mean, as you mentioned, we did reiterate our three year guidance and.
George has mentioned, we do really expect inflation to normalize.
I'd call out.
Things that we called out in Investor Day, our strategy is working we are expanding margin, while reducing leverage or growing sales. So we feel confident that that range that we've given for the three year guidance is absolutely something we can still hit.
Where we're growing we're showing really quality earnings again with independent restaurants first our foodservice into convenience. So we feel good about certainly into 'twenty five targets.
Great. Thanks, guys I appreciate that.
Okay.
We will take our next question from Alex <unk> with Jefferies. Your line is open.
Hey, Thanks, Congrats on all the success.
Just a question on the assumptions for the fourth quarter reflected in the guidance.
Guidance update and I guess, how much in the more modest revenue outlook at the midpoint can it comes from the lower foodservice inflation versus lower tobacco sales view or other dynamics there.
Is the foodservice inflation is that actually flipping to slightly deflationary in the <unk> or is it.
<unk>.
Fill up a bit.
No.
I think we will close both Patrick and I will we'll comment on that.
Your comment.
Tobacco area, that's certainly.
We're going to continue to be soft.
They're very large revenues there.
We feel that that will be the case, but we also feel that that our core Mark Division, we will continue to manage their way through that.
The inflation.
Rich.
Residing I guess going to really some deflation in foodservice is part of it and then there's a third component.
And thats it.
Modeling, our national account customers in aggregate.
To be soft.
And they are continuing to run.
Low single digit negative.
Cases.
We don't.
When a model anything that shows that any different so I would say that would be the things around the revenue area.
Comment a little bit more on inflation before I turn it over to Pat.
Like a lot of things with us we have such a varied customer mix that the inflation.
Has come at different times.
So in foodservice.
We're actually running.
Much better case growth than sales growth right now, we think that will turn back around and we will start running moderate.
Inflation.
And that hits.
Immediate.
When you get to our national account business, and particularly the big casual dining chains. The inflation hit later there.
All have different cycles, but they tend to lock pricing in for.
Fairly lengthy periods of time.
That inflation came choppy some of it was fairly soon depending on their cycle and when Thats going to go away is when they go through that next cycle and then we expect that to be just low single digit type.
Customize where a lot of the dollars are in the tobacco area.
Obviously, that's going to show continued inflation pretty.
Pretty regular price increases and everything else has been through.
In some cases, an additional price increase in some cases, they just moved up when they normally do a price increase and as we get to a normal environment and we start to lap those increases.
I think we will see that come down to kind of low <unk>.
Single digit and then even within all of that Okay, which is complicated enough.
We've had such a mix change in our foodservice business, where our business has just moved more and more towards higher case cost products.
Our cheese business has been particularly robust as has our center of the plate business.
A lot of moving parts, but we think things are eventually going to look a lot like they did treat pandemic.
Yes, I'll just make a couple of quick comments I mean again.
We're really excited about our ability to raise guidance. This morning, we've done this periodically throughout the year and we're really positive about where we're growing our business again independent restaurants are foodservice and convenience, but I will say when it comes to our guidance for Q4, I mean as George just described we do have some headwinds.
Specifically, what's going on with inflation and that year over year inventory gains and then Theres just a macroeconomic.
Turns out there. So I think we're just being prudent with the guidance.
That makes sense.
The mixed benefits have been really impressive.
Wanted to ask on the convenience business core Mark and any commentary there on the new business pipeline any kind of surprises this continues to build.
The expected timing of when maybe you see some new business come on.
Yes.
I think that when we get to August we'll be a better time for us to comment on that.
I will say is that we feel real good with it.
We once.
Once again long sales cycle.
We have some things that we feel are actionable, we've got to get some capacity in some of the physical capacity.
And I think we'll have a little bit more comments when we get to August but thanks for the question is a great question.
Thank you.
We will take our next question from Kelly Bania with BMO capital markets. Your line is now okay.
Yes.
Hi, good morning, Thanks for taking my question.
I had two questions both on the <unk>.
And convenient.
For those two segments. One can you just help us understand the magnitude of the volume or Keith.
Do you still see from service levels, just normalizing back to maybe typical level.
Can you just help us a little bit more clear on the magnitude of the inventory that you will be.
Cycling in the coming quarters or those channels as well.
Yes, I'll start with the service levels.
They've they've continued to be well.
Below.
Pre pandemic.
They are both businesses and distorting convenience, where you don't necessarily lose the sale they may put another SKU.
In there.
So.
Not necessarily the case, so it's hard to determine what benefit we're getting is the service levels, our fill rates get back to normal.
The other thing is that many suppliers reduce the number of skus that they offered during that period of time and we are starting to see some of that come back.
We feel could help sales, but once again.
They just didn't leave.
Our slot open.
Because something wasn't available they put something in there. So I think that's probably real hard to determine as far as inventory gains and what they were.
We really would prefer not to get into that level of detail because we don't want to be in that level of detail forever.
Inventory gains or are part of our business, particularly in convenience and.
This star and it can be a significant part of the profit.
That we get from certain product areas because that's that's the time when it is.
When you produce your profit otherwise you just move in cases.
<unk>.
Pat I don't know if you have any other comments with that Kelly I'll just refer you back to our Q1, when we had a beat we did say on the call that the inventory gains helped but they were not the majority of the data tells us refer you back to that quarter.
Okay.
Okay. That's that's helpful and I guess.
Just maybe another question on an inflation a lot of investor questions on inflation.
I presume it falling quicker at the foodservice side of the business because of the fresh category and the exposure there versus.
Some of our shelf stable.
Categories that start in convenience.
Just wondering if you could just walk us through what youre seeing in terms of elasticity.
That those fresh categories, maybe come down and what Youre seeing in the volume responses as a result as well as just the competition are you seeing any change in the competitive environment.
Some of those categories that had been elevated are really coming back down.
Well those perishable areas, it's always real competitive everybody through the cycle has to move the product.
So I wouldn't say, it's any different than it was before.
That is the bulk of the deflation that we're seeing is from perishable product Theres also.
Some deflation that really isn't the food itself, but.
Container loads of particularly when you get to imported product. The freight was so elevated for a while we do have significant volume, particularly from Italy.
<unk>.
Imported products and the cost for a shipping container has gone from not as high as 20000 down to as low as 3000 and.
And when you spread that over the amount of cases that.
Peers as if its deflation, but it's not product deflation is just the supply chain.
Getting back under control.
But for the most part when you get into further processed products.
Fight very very hard to get price increases through the system.
And they're not going to they're not going to lower pricing. They may take less of a price increase in their normal cycle and they may even skip a year, we don't know what theyre going to do but certainly reducing prices is not something that.
It is commonplace.
Thank you.
We will take our next question from Brian Harper with Morgan Stanley . Your line is open.
Yes. Good morning, Thank you guys.
Wanted to come.
Come back to the point you made earlier on kind of labor productivity.
What do you think would prevent that from getting back to pre COVID-19 levels and what additional work do you think there is still to be done on the productivity side.
I think it's just learning curve is the biggest.
Warehouse job is is not extremely difficult other than the physicality of it but there is still a learning curve and people climb to the early stages of that learning curve very quickly.
But they continue to get better at what they do and they continue to get more accurate and I think we have more benefit to get from that.
And drivers.
It was very short gone into Covid as far as.
Being able to get drivers there was quite a shortage and it's probably right now similar to what it was pre COVID-19 not as bad as it was during.
During the pandemic.
But those people also they get better and better as drivers.
And they learn the job.
And they just get quicker and they get more accurate and we just have got.
You got to have the patients to walk people through that and I think that.
We should be able to get back to the pre COVID-19 kind of productivity and that will mean a lot for us.
Okay. Thank you and then.
George I think in the past you've commented on some of the different customer segments within independence, what's kind of where youre doing the best right. Now you are also big in Pizza of course, I think we would just be curious to know what youre seeing and kind of the pizza segment for example.
Pizza, we continue to do well.
Segment itself is not doing as well as it is it did certainly during COVID-19.
But we're continuing to run single digit growth.
Pretty much mid single digit growth.
Not where we would like to be but we're pleased when we get our market share information.
We're doing very well in Hispanic.
We're doing better than we've done in the past.
And.
Fine dining area, it's not a huge percentage of our business, but it's doing very well, particularly center of the plate.
Always done well in.
The independent casual diner, and we're doing very well, there and that would be the categories, where we're doing the best.
Thank you.
Okay.
We will take our next question from Mark Carden with UBS. Your line is open.
Good morning, Thanks, a lot for taking the question. So you guys have posted some pretty strong private label results. In recent quarters are you guys seeing any changes in adoption as inflation comes down because it very much fact cuisine type or at this stage as your brand equity just strong enough that youre continuing to see similar improvements in penetration.
Well, we are continuing to see the percentage of our sales that our brands grow and it's I mean, it's consistent month to month, and we put a pretty big emphasis on that but we put the biggest emphasis on making sure that we get the customer what they want.
It's our center of the plate, that's done really well.
<unk>.
And when you get to a large category for us like pizza, that's by far our highest percentage our brand goes into into that customer base.
And we Incent, our people pretty well to sell our brand.
I think that.
If the macro gets worse it will probably help everyone in our business with their brand because.
The foodservice distributor tends to have a better price value on their brand and then a national brand and we will benefit from that we're pleased with where we're at.
If we continue to see the the month to month higher percentages that would be better yet but.
But we're real pleased where we're at.
Makes sense and then you guys have put together some pretty strong numbers once again in the independent market segment how.
How are you thinking about the health of the independent restaurant industry wide in the current macro backdrop and related how are you thinking about the resiliency of the segment.
We enter into a longer recession.
Well I'm going to speak more to what our customer basis.
Our independent customers are doing so much better than our chain customers are and I think that we.
We've been able to push them up quality ladder as much as you can and you know in this type of macro environment and they move fast and they can make changes.
I feel real good about the independent restaurants here and I think that.
There are some great chains out there, but a lot of people just they want to go to something unique that when a unique experience.
Get some unique menu items.
I think it is resilient and I think it is going to continue to do very well.
Great. Thanks, so much good luck guys.
Thanks.
We will take our next question from Andrew Wolf with C. L. King Your line is open.
Thank you Hey, good morning, everybody.
I wanted to ask about.
Operating expense growth.
And the Broadline business, which you know.
Decelerated nicely, but.
It's still above case growth.
Thanks, Tom pack, there one I assume it's a lot more expensive overall for the supply chain.
Just to deliver to an independent.
Beyond that since Youre mixing it has more to new independents that adds another layer of expenses could you give me a sense of our us and expensive.
How satisfied you are where you are now when you talk about macro normalization I assume it means the cost structure, how much more there is to come and what the timing of that is yes.
I think there's two things there I think that.
Our productivity isn't where we needed to be and we're investing.
In people so we have more.
Our percentage increase in drivers and warehouse people exceed the.
The increase in cases, and we're really pushing that productivity and we're pushing down the amount of overtime that they have and then we've invested heavily in this cycle and our sales force.
We've slowed that down some because we have a good bit of training to do but we're still close to double digit over last year and number of salespeople and that's a big expense to carry when youre not growing at quite that rate. So I would say, it's those two things and we feel good about where our expense ratios are headed door productivity.
Keeps getting better and we have a confidence level around the new salespeople and the productivity that we'll be able to get from them.
Okay.
If I kind of like to follow up on some of your sales commentary.
You said.
For the quarter, there was some penetration but.
When I heard it was.
Obviously omicron helped a lot with that.
Is there any thing.
Seeing sustainable with I think.
At the ICR Conference you were saying.
Case growth at Sam restaurants was not that good lackluster or worse is there anything either changing in the market that maybe is improving or more likely something youre doing with the sales management.
Yes.
Perhaps penetration might improve from here or is it.
Just kind of very very with your independents are doing.
Well I think a lot of it is just how our customers are doing as I mentioned earlier, we have this consistency around increase in customers.
We're not getting a lot of penetration into the customers as far as dollars I mean their purchases versus the previous year in cases, better way to look at it.
And.
What we are seeing though when we get to the end of the month and run a report.
We're adding skus those skus arent showing up.
As more line items on the average order because the items that.
Maybe they typically ordered at once a week and now they're ordering it three times a month or whatever if they were using 15 cases a franchise a week before maybe now Theres 13, as we see more restaurants come back online I've mentioned this several times, but these truly are single purpose buildings and it is very very rare that.
When a restaurant has taken that something comes into that space other than a restaurant and I think that will all come together and level out as well and that will once again looked like pre COVID-19.
<unk>.
You won't have this number of new restaurants, coming online and I think that the good operators are going to start running growth over the previous year as to where now I mean, we see it.
Ah.
Big scale with our our chain customers, they're just not running same store sales growth I mean, theres exceptions to that certainly but for the most part they are not and I think.
The restaurant World.
A lot more like.
It did pre Covid soon.
Okay and finally.
George you spoke about the sales funnel.
Coming into convenience I think you said with some national chances.
Things that are either in a bid process or are you more something a little more solid where you're kind of in the last stages of writing.
Writing contracts and stuff like how good do you feel about it.
Getting some yes.
Yes.
Customers there.
I think just the comment that we have a really good sales funnel and it's a long sales cycle and that's really about all we can say.
And once again that we feel good about where we're at.
Okay.
Thank you.
Thanks, Andy.
Well, we will take our next question from Jeff Bernstein with Barclays. Your line is open.
Hi, Good morning. This is product on for Jeff. Thanks for the question.
You've spoken about chain business declines in the past couple of quarters, just wanted to understand if that's something you're consciously shedding.
Some unfavorable accounts or is it a scenario, where you see chains actually experiencing some decline.
That would be perhaps contrary to what we've heard from restaurants that have reported the past couple of weeks and then I have a follow up.
Yes, well as far as what restaurants are reporting.
We have our our stable mix of business and in aggregate they are running negative.
And as far as shedding business, that's pretty rare for us to do we've done some of that.
Sometimes we just feel like we need a certain.
C to continue with the customer and.
And.
Pretty much we lose the business, it's just rare for us to to fire a customer, but we're in a position right now where our business pretty stable.
We don't so many people that we didn't sell a year ago.
Almost everybody we had a year ago, we have now so they're pretty good comparisons.
And we would like to be more aggressive than we are now.
Part of that was getting a handle on where our expenses are.
And we've had some real good improvement there.
And.
Probably nothing more to say I believe obviously, we're not going to count.
Comment on any customer, particularly but we have some good ones. We have some that that are good accounts and are good operators and they're just going through a difficult period right now.
Yeah.
Got it makes sense.
And then pivot to M&A.
Leveraging nicely over the past few quarters and it looks like you're comfortably in your leverage range.
<unk>.
We have a lot of dry powder could you talk about the current environment.
Your opportunity or perhaps accelerate M&A when you're smaller peers are presumably more challenging a slowing macro.
Yes, I would think that this would be a real good time for us to do some M&A.
Can't say that we have anything thats imminent, we're trying hard.
I think it's also a time, where it's difficult for somebody in private equity to do it where the debt markets are and they've been a competitor. So it's probably less competitive but you still need two willing parties.
We're working hard at it and I don't have anything I can report that we have coming but we do feel like we're in a position where so much of our debt is fixed.
And we have a good balance.
Hence sheet, where we need to be.
And.
We just we just need to get.
Willing parties, I guess that would be the way to put it.
Yes very helpful. Thank you.
I think you've covered everything thanks.
And once again that is star one if you would like to ask a question. We will take our next question from Lauren Silberman with Credit Suisse. Your line is open.
Thank you very much and congrats on the quarter.
Firstly, you talked about new customer acquisition and consistent at that 67% rate is the wallet share penetration with these new customers consistent with what you see with historical cohorts. So to speak and then second to that is are you do you see that how long does it take for that new customer to make sure.
Sure, Yes, I guess, so all penetration, which I think you said before.
30% on average.
Yes, it's an interesting it's an interesting question.
Because it's different than it has been in the past we've been running a report every week, where we look at.
New customers that we hadn't sold before and what their average order sizes, it's not much different than our existing customers.
Which typically in the past there has been a maturity about it.
Tend to get.
A weaker position in the account to start and grow it from there but right now.
And it's an anomaly for us versus our past but.
They are about the same same size customer and remember that 6% to 7% is a net number so.
We also have.
Unfortunately accounts that we lose.
The new ones, we're bringing on there they are coming on.
Is fairly mature looking accounts.
Yeah.
Very helpful. And then just about 3% case growth in the quarter benefited from outsized January I know Theres a lot of moving pieces within independent cans in other parts of the business, but can you help us understand putting it all together how youre thinking about total company case growth next quarter I guess as we think ahead.
So much that us is around that that word mix.
We.
I mean, the 3% case growth quarter can be very very good for us and it could be very bad for us depending on.
How that affects the mix of business.
But.
We're modeling in that basically three to five pads.
And that's about what we're looking at right now and we want to continue to get that case growth.
In the segments, where we have heavier focus in heavier profitability.
Very helpful. Thank you very much.
And we will take our next question from Joshua Long with Stephens, Inc. Your line is now open.
Great. Thank you for taking my question I was curious if we could dive into some of that.
Digital technology tools that you have you mentioned your customer.
Platform is largely rolled out across foodservice at 90% and maybe a 100% of the Vista, just curious where you are in terms of being able to leverage that.
Now that it's largely rolled out and then as we think about down the road is there an opportunity to also leverage that across the convenience side as well.
Yes, that's a great question I appreciate it one as you mentioned, we talked about how it's rolled off over 90% of foodservice at 100% of Vista.
I do.
I want to reiterate we're very early in the process of Onboarding customers.
Foodservice is coming along nicely and <unk> is doing very good job of Onboarding. These new customers.
And again the feedback from the customers was very positive.
We're really focused on providing them a great experience and allowing them to continue to work with their salesperson, even more closely as they use this digital tool to continue to buy more products on convenience absolutely. We just wanted to get this we're doing this year on a step process. So first those fits our them food.
Service and then eventually we will target convenience as well and then that really is when we can unlock some of those cross selling opportunities across all three segments with our customers.
Got it that's very helpful. I appreciate that and then one follow up for me when you think back to your comments about how fill rates were getting back towards pre pandemic levels.
On lower.
Breadth of Skus.
Maybe get back to from a SKU perspective back to where we were pre plant is that a positive does that introduce.
Incremental challenges from an operational perspective, just how do you kind of interpret that or how would you what context could you add there just in terms of what it means from an operational or business perspective.
That SKU counts start to rise again.
Well, we haven't had a significant change in foodservice so that is more towards core Mark and this star.
And I think that all in all I would consider it a positive.
As they bring back skus, but obviously, if they were real slow moving skus.
We would probably.
Look at that as maybe a slight negative.
Yes.
I just don't.
Don't think that that's going to have a material change we would rather see a supplier thats still struggling.
To to get the supply chain right on the Skus that they have today.
And then move from there into some additional skus, but we are still experiencing fill rate issues, particularly with the large CPG suppliers that we have.
Understood. Thank you.
And it appears we have no further questions on the line at this time I will 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.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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