Q1 2024 Performance Food Group Co Earnings Call

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Good day and welcome to Pfg's fiscal year Q1 of 'twenty 'twenty four earnings conference call.

If you would like to ask a question at the conclusion of the prepared remarks. Please press the star key followed by the one key on your telephone keypad at any time I would now like to turn the call over to Bill Marshall Vice President Investor Relations for PFG. Please go ahead Sir.

Thank you and good morning, we're here with George Holm, Pfg's, CEO and Patrick catcher Pfg's CFO, we issued a press release. This morning regarding our 2020 for fiscal first quarter results, which can be found in the Investor Relations section of our website at <unk> Dot com.

During our call today, unless otherwise stated we are comparing results to the results from the same period in fiscal 2023.

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 in 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 metric.

Our remarks on this call and in the earnings release contain forward looking statements and projections of future results.

Please review the cautionary forward looking statements section in today's earnings release, and our SEC filings for various factors that could cause our actual results to differ materially from our forward looking statements and projections now I'd like to turn the call over to George.

Thanks, Bill good morning, everyone and thank you for joining our call today I am pleased to share our strong first quarter fiscal 2024 results with you today, highlighting our business momentum, which continues despite a range of macroeconomic factors.

As you saw in our release this morning, our topline performance was just below the top end of the guidance range, we laid out in August.

And our adjusted EBITDA was above the top end of our guidance range.

Our results show, our company's ability to perform at a high level.

Range of economic scenarios, and we expect this to continue going forward.

Once again, we are very pleased with our independent restaurant case growth, which was seven 6% in the quarter as we continue to add new accounts and grow our share in this important channel.

We recognize the economic backdrop is the dominant factor in the investment decisions that each of you make on a daily basis in a moment I will address a few of these items.

And share our view on the current state of the foodservice distribution industry.

First I wanted to discuss Pfg's strategic focus.

And reasons that we believe our company will thrive in the years ahead.

PMT has evolved significantly since we went public in 2015, we have added new lines of business broadened our end market channels and added products and services to capture market share and the large food away from home industry.

This shift has been deliberate and we believe that positions <unk> to grow both our top and bottom line for years to come.

Our foodservice business has built scale and breadth in an effort to elevate our independent restaurant sales, we had and continue to invest in our sales force and build new capacity.

To allow for a long term market share gains, which has proven to be a winning strategy in a moment Patrick will provide more details on our strong results in the independent restaurant business.

This store has adapted with the marketing continue to reinvent itself from an organization that largely served the vending machine industry. This started now sells a wide range of unique products servicing more than 10 distinct channels. These.

These products range from the traditional candy snacks and beverages that this star has always sold and have expanded to include healthy alternatives like protein bars and.

In prepared food.

As well as health and beauty AIDS, non food packaging and impulse purchases and the range of beverage options.

Expansion of discharge product offerings has allowed for a significant increase in channel distribution opportunities were.

We are particularly excited about the opportunity we see in the micro market area, which has been growing substantially.

The macro market concept allows for a wide range of product offerings and is benefiting from the structural market shift towards this retail format. We believe <unk> is well positioned to fully capitalize on this opportunity.

Fulfillment is another area, where we see significant growth potential we are investing in facilities that are equipped with automation that allows us to efficiently ship small parcels directly to customers and consumers.

For suppliers. This has a beneficial partnership, allowing you to start to manage the last mile distribution of a range of products.

We believe this is an opportunity with significant runway for growth for Vista.

All our facilities servicing this market are currently operating at margins above the <unk> average the ability to produce above average margins is driven in part by a push into the business that is priced on a fee basis with.

With many of the supplier partners, we do not take financial ownership of the product producing very high EBITDA margins.

Over time, we expect scale efficiencies to improve these margins further we have a plan to expand our capacity into additional sites.

Will allow us to achieve one day shipments to most of the continental United States.

Finally, we are extremely excited about the opportunity to core Mark has brought to PFG. The convenience store landscape is undergoing a shift away from traditional tobacco products towards more options and food and beverages, our broad expertise in food.

Foodservice and immediate consumption is combined with core <unk> knowledge and relationship with the convenience industry.

This partnership with spans all of Pft's operating segments is expected to provide a long period of market share gains with both top and bottom line growth.

The convenience backdrop has been somewhat softer over the past few quarters still we are very pleased with the adjusted EBITDA results core Mark has achieved and importantly, <unk> topline performance has exceeded the industry growth rate in many key categories, including significant outperformance in the foodservice and snack categories.

The pipeline of new business opportunities remain significant and we expect to add new customer accounts at a steady rate over many years.

Historically PMT as a company that has not only been resilient in difficult times, but it has improved during periods of stress.

The pandemic was a clear example of this during which time, we gained more market share than we typically would over a multiyear period.

While we would all prefer a smooth operating environment, we do not shy away from moments of volatility.

We view it as an opportunity to get stronger and solidify our position as a market leader and propel our business to new Heights. It is no coincidence that our company has seen some of the largest market share increases during periods of disruption, including prior recessions and the Covid pandemic.

With that let's take a moment to put the current macroeconomic backdrop and focus and discuss how we expect to navigate short term factors influencing the food away from home market.

I will walk through our thoughts on the health of the consumer.

Traffic trends and the impact from inflation and deflation.

There has been much discussion about the health of U S consumers and their willingness and ability to purchase food away from their home.

Despite significant discussion of a potential drop off in consumer demand, we have not seen that materialized to date with that said there are pockets of the business where purchase behavior is somewhat softer than what is typical.

<unk> the traffic at convenience stores, but just mentioned this dynamic is a natural reaction to the cigna.

Significant level of inflation that hit the market in fact, given the rapid price increases for nearly all products and services that run through our economy. The consumer has proven to be more resilient than many would have predicted at the start of the calendar year.

While headline inflation has been slow to move lower we have experienced deflation in our foodservice segment over the past two quarters through this time, we have demonstrated our ability to show growth and adjusted EBITDA margin expansion. Despite these deflationary pressures through a combination of the work.

Our sales force executes on pricing along with the continuation of the significant positive mix shift to independent restaurants. These deflationary pressures have been very manageable.

We would expect this trend to continue as deflation were to persist. However, we are pleased to see deflation lesson and move towards a more neutral position in fact trends in the commodity market, particularly the deflationary areas of proteins has played out just as anticipated with lower levels of deflation sequentially in both.

Just in September.

If this dynamic continues as we expect foodservice will likely be back to slightly inflationary at the beginning of the calendar year, which is our fiscal third quarter by the end of the fiscal year, we expect foodservice inflation to be back to a healthy low single digit pace.

I'm going to turn it over to Patrick who will discuss our results and specific drivers of our performance.

And then provide more color on our guidance for fiscal 2024 and beyond.

I'm going to leave you with a few key themes first we believe PFG is very well positioned in the large and growing food away from home market with exposure across nearly all channels and product offerings.

Second the consumer remains resilient, despite multiple years of above normal inflation and finally, our company has weathered difficult economic conditions in the past.

Is growing stronger during periods of volatility our view is that the market is stable and PFG continues to evolve and grow by investing in our people and assets in our effort to produce long term shareholder value. We're excited for what the future holds and appreciate your interest and performance food group I am now going to turn it.

Patrick.

Thank you charge and good morning, everyone.

As George mentioned on behalf of our 35000 associates, we are excited and proud to share. The strong start we had to our 2020 for fiscal year with our first quarter results, we announced this morning.

I'd like to start this morning by reviewing our outlook for fiscal 2024 and beyond.

I will then review our financial performance and some of the specific drivers across the three segments.

Ill conclude with Pfg's financial position and capital allocation priorities before turning to the Q&A portion of the call.

As you saw on our press release. This morning, we announced guidance for the fiscal second quarter and update our full year and long term outlooks.

For the second fiscal quarter of 2024, we expect net sales to be in the range of 14 billion to $14 $3 billion.

Adjusted EBITDA to be in a range of $325 million to $345 million.

A couple of thoughts on what is embedded in our fiscal second quarter outlook first we expect the foodservice segment continued to experience mild deflation in the quarter, while moving towards flat as we enter the fiscal third quarter.

On a total company basis.

No longer experience a difficult inventory holding gain comparison.

These gains largely normalized in last year's fiscal second quarter with that said on a segment basis. This star will have a large inventory holding gain comparison and QQ, which we expect to be reflected in the year over year growth rate for <unk> adjusted EBITDA.

Underlying business results for best are remain very strong and we expect nice profit growth from that segment when we reach the back half of the fiscal year.

For the full fiscal year, we continue to look for net sales to be in the range of 59% to $60 billion.

We now expect adjusted EBITDA to come in at the Upper end of our previously announced $1 45 to $1 $5 billion range.

We are essentially flowing through the upside from our <unk> 24, adjusted EBITDA performance, which was above the upper end of the outlook, we announced with <unk> 23 earnings.

Outlook assumes deflation should persist in the foodservice segment through the fiscal second quarter rising to flat to up slightly in the back half of the fiscal year for Vista and convenience, we anticipate decelerating inflation through the remainder of the fiscal year <unk>.

Reaching a steady state in the low to mid single digit range by the end of the fiscal year.

Our inflation assumptions have not changed from what we discussed last quarter and inflation dynamics have played out largely as we anticipated.

We are reiterating our long term outlook, which projects net sales to be in a $62 billion to $64 billion range in fiscal 2025.

Adjusted EBITDA is expected to be within a one five to $1 $7 billion range in fiscal 2025.

With that said, we continue to see upside to our fiscal 2024 results as reflected in our updated outlook and we are increasingly confident that we will be comfortably within the adjusted EBITDA range in fiscal 2025.

As you can see from our outlook for the next two fiscal years, we are confident pfg's current trajectory and believe that our business is on solid footing lets review some of the highlights from our fiscal first quarter and underlying drivers of our performance.

And our first fiscal quarter of 2020 for PFG generated total net sales of more than $14 9 billion.

A one 5% increase year over year.

Our sales performance was driven by a <unk>, 6% increase in total case volume for us.

Our case performance was particularly strong in our highest margin channels, including independent restaurants, and several of our end markets.

Independent restaurant cases increased seven 6% in the fiscal first quarter. Another outstanding result that reflects market share gains in that important part of our business. Once again, our independent case growth was due to new account wins, which increased seven 5% in the period.

Portland, while our chain volume was down modestly in the quarter the rate of decline was sequentially better and <unk> 24, compared to the fourth quarter of last fiscal year.

We will continue to run our chain business by partnering with strong and growing chain accounts.

Total <unk> gross profit increased five 6% in the fiscal first quarter to $1 7 billion.

We continue to show nice gross profit performance and margin expansion due to a positive mix shift across our businesses are.

Our gross profit performance in the quarter reflects our ability to produce solid profit growth. Despite a deflationary environment in the foodservice segment.

Gross profit per case was up 19.

In the first quarter compared to the prior year's period.

In the first quarter PFG reported net income of $127 million, a 26% increase year over year, adjusted EBITDA increased about 8% to approximately $384 million.

Yeah.

Diluted earnings per share in the fiscal first quarter was 77 and adjusted diluted earnings per share was $1, 15% to 24% and six 5% increase year over year, respectively.

Total talking inflation continues to moderate due to deflation in the foodservice segment and slowing rates of year over year inflation in both the star and convenience segments.

Total cost inflation was three 1% in the fiscal first quarter. The deceleration was driven by our foodservice segment, which experienced a two 3% deflation in the fiscal first quarter.

Mr inflation continued to trend lower in the quarter, though still remains elevated compared to historic norms and finished the quarter in the high single digit range Directionally. The convenience segment is experiencing a similar dynamic showing high single digit inflation in the fiscal first quarter.

I'd like to conclude our remarks today with some thoughts on our financial position, including our cash flow generation balance sheet and capital allocation priorities.

<unk> continued to generate healthy operating and free cash flow in the quarter.

Operating cash flow was $87 1 million in the first three months of fiscal 2024. This was a very strong result that included some additional investments in inventory towards the end of the quarter and particular, we had a large tobacco by in September as you are aware, we periodically build inventory in certain products, including <unk>.

<unk> and Candy and then sell that inventory through the subsequent quarter, we expect to see positive cash flow generation in future periods from the sell through of this tobacco inventory.

After investing $53 2 million and capital expenditures PFG generated $33 9 million of free cash flow.

Investing in our business remains the top priority for our company.

This primarily includes growth projects to build additional capacity to support our long term growth aspirations. For example, we are very excited to have opened new foodservice facility and our home Virginia market.

We believe that investments like these will generate significant returns over time, adding to our topline growth, while making our company more efficient.

After capital expenditures, we have three main uses for our additional cash flow, including M&A leverage reduction and share repurchases.

We evaluate these decisions based upon the volume we believe each would create for our shareholders and strategically deploy capital against this view our share repurchase program considered the value of our stock as well as the relative valuation compared to historic levels.

In the fiscal first quarter, PFG repurchased 5 million shares for a total of $28 1 million subsequently in fiscal October the company repurchased approximately half a million shares for a total of $27 9 million.

Which has an average cost per share of $55 69, SaaS. We are confident in our long term prospects and reflect this through our share repurchases.

We also continue to look at strategic M&A as another avenue of shareholder value creation.

We are proud of <unk> track record of integrating acquisitions throughout our history.

With the exception of small immaterial deals we have not completed larger scale M&A since the close of core Mark just over two years ago.

The team is working as hard as ever to identify interesting opportunities.

While remaining disciplined on price and strategic fit.

We tried in our past success in M&A largely due to our detailed <unk> process and we are unwavering in our methodology.

We believe that this process has become increasingly more important in the current interest rate environment.

Finally, we have focused our efforts on maintaining a healthy balance sheet.

You have been right at the midpoint of our two five times to three five times net debt to adjusted EBITDA target for several quarters and feel very comfortable in this range.

The fiscal first quarter again right at the midpoint of the target range we are.

Also carefully consider the balance between fixed rate and floating rate debt and used interest rate swaps to convert a portion of our ABL balance to a fixed rate at the close of the fiscal first quarter of 2024, 76% of our total outstanding debt was at a fixed rate, including these swap contracts we believe our current.

Level of debt provides ample flexibility to fund our ongoing operations, while leaving room for the capital allocation priorities I just highlighted to summarize PFG started fiscal 2024 with a strong first quarter and we feel increasingly confident in our ability to deliver strong results over the next two years as shown by our <unk>.

Outlook, we believe our business as well and to achieve strong results. Despite changes in the macroeconomic environment and we are investing in long term success for our organization and our shareholders.

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 star one on your telephone keypad.

You may remove yourself from the queue at any time by pressing star two and once again that is star one if you would like to ask a question.

And we have our first question from Edward Kelly with Wells Fargo.

Hi, guys good morning nice quarter.

By the way for all that color.

Sure.

Around the various.

The various puts and takes there George I wanted to follow up on the macro I guess first.

Can you just maybe talk a little bit more about the cadence of the growth in case volume during the quarter, especially independents you started off pretty hot.

In that Department, which you mentioned last quarter, just curious how things have played out since then and then what youre seeing so far.

In the second quarter, and then just thoughts.

Change that guidance.

How youre thinking about case volume trends and the sustainability of what Youre seeing today through the rest of the year.

Okay.

Yes, we started the fiscal year off very strong, particularly in our independent business.

We had I think seven eight I think the quarter before.

And we were just slightly under nine in July.

And in the month of August we were only slightly over six.

And then in September it came back to that mid Sevens.

I think all in all I mean, we would like to have been stronger obviously, but I do like the consistency that we're seeing now versus kind of that COVID-19 period, where.

You can have a three one week and up 14, the next than it was.

It was very volatile as.

As far as guidance.

We think where we're at now.

Probably about where we're going to stay.

We didn't we did that with seven six increase in.

In cases, but seven 5% increase in customers. So we're still not seeing good growth rate at the customer level and Thats in spite of.

Selling more skus to the customers and we were selling to them a year ago.

Just shows EMEA at that restaurant level, there is still some softness.

We do expect to see our national account business be better.

As we get further into the year.

Thought that last year too and it didn't materialize, but we're pretty confident right now that as we get to the back half of the year, we're going to see some case growth.

In national.

And just a follow up when you look at gross profit dollar growth.

Back out that procurement headwind gross profit dollars were probably up I don't know 7%.

Around that or maybe.

Just under 3% case growth a couple of things here, you mentioned cost of goods sold optimization, even before mix in the press release.

Can you talk a little bit about what that is the sustainability of that and then as we have.

Inflation come back into the business into the back half of the year.

Talk a little bit about how that impacts that relationship with cost gross profit dollar growth versus volume growth.

Well I think inflation is our friend.

When it gets too high it just too much of an impact on the macro.

We tend to.

To be able to continue running the margins.

In an inflationary environment that we do even.

Even when it's slight deflation that tends to help us.

Most of our margin growth, we had in the quarter over the previous year really had to do with mix.

Mix within each one of the businesses and of course the.

Case growth being so much better in independent and our margins being better there.

And that that should continue for real.

The fiscal year, Scott a little headwind in inventory gains last year to go up against <unk> in Q2.

But it's not anywhere near what we've dealt with in the quarter that we just ended particularly.

Our core business.

Yes, Ed I'll, just add real quick if you think about what we've explained is our strategy around margin expansion independent cases, but also.

Penetration with brands growing the best our channels food and foodservice into convenience all of those are really working very well for us.

Great. Thanks, guys. Good luck this quarter.

And we have our next question from Mark Carden with UBS.

Good morning. Thanks, so much for taking the question. So to start another question on the independent business are you guys surprised at the resiliency of this customers that you think there's much of a benefit from more normalized peak hour labor at independent restaurants.

And then also within your independent business, where are you seeing shifts in demand.

Okay.

Yes, as far as being surprised I think when you look at the restaurant industry right now and you hear a lot that it's.

Slower and it is certainly.

The information that we get transactions are down but people are spending more money in restaurants, and they did a year ago now thats led by menu inflation. So it's just kind of an odd time, where.

We are experiencing this inflation.

In the menu, but we're experiencing in foodservice, we're experiencing deflation on our product and I think that that's just because it took restaurants, a while to get those price increases in I think somewhere afraid to raise their price, which is understandable and some prices are going so quickly they didnt want to under <unk>.

Hugh.

I actually think some overshot.

Because they didn't expect this deflation to come so I don't think.

I don't look at the restaurant industry has been slow or the consumer.

Backing off from restaurants, because they are spending more money than they were before and as these menu prices get more accepted.

I think we're going to get back in that position to where traffic.

It comes back.

Got it and then as my follow up on the sales force build at this stage are you still expecting to add any more additional salespeople or is that largely done at this point and then how should we think about how long it can take for these new salespeople to reach their full productivity how much of a.

<unk> are there.

Yes, because we felt like we got behind during the pandemic. We did go through a period of a few months, where we actually had 10% more salespeople than the previous year.

Right now if you look at the three different numbers were around seven five case growth of around seven 5% increase.

Customers and were about 8% and our number of salespeople.

For us 8% is.

Is strong.

Not what we've typically done in the past.

We will probably come down off of that number some.

And.

We have such a wide variance and you had asked about how long it takes them to.

Two to start to be more productive we have such a wide variance with people that come to us with no experience in the industry. It might take them a couple of years and we have people that come with a great deal of experience often with the noncompete.

They tend to do well fairly quick.

Certainly after.

Compete expires they tend to do really well, so I would say that we're probably.

Hiring more people today that are coming in without the direct experience in the industry as a salesperson. So it's going to be more than that year to now that's not a big expense that we would be bringing on because we have that cadence of where we've been doing that for a long time. So as long as people are clicking after that.

Period of time, it doesn't really affect our expense ratios.

Makes sense, thanks, so much and good luck.

Thanks.

And we have our next question from.

Kelly Bania with BMO capital markets.

Okay.

Yes.

Good morning, Thanks for taking our question I wanted to go back to the independent cut.

Customer Keith growth, which.

Clearly remains strong here, but it sounds like it's being driven largely by new account growth can you just talk a little bit about that new opening is that customers switching to PSP.

Just trying to understand a little bit Denise.

Driver of that new account growth.

Yes.

Well a good bit of it is new accounts are opening there were a lot of vacated not anywhere near where people expected, but there were a lot of vacated buildings and they are single purpose buildings and it's just taken a little longer for some of them, where they're remodeling and making changes to the box.

And I think that's caused some of the softness at the store level when you've got new places opening and people like to go to New places.

I think that that's probably just still.

Results have gone through the pandemic and then I'd like to think that we're always getting new customers that are just switching distribution, but I would say that in today's world a lot of it is new accounts new openings.

Okay.

Okay. That's that's helpful. And then maybe just wanted to talk about convenience a little bit.

I think there were two comments and then released one about a strong pipeline of new business. So I was wondering if you could just talk about what that looked like what that looks like Zara.

Big RFP kind of cycle coming up here, or just where youre seeing opportunities for new business and then.

It was also a comment about leveraging the PX P&C platform and maybe just an update on <unk>.

And two its convenience and core Mark are really leveraging PFT platform at this point and how that could continue to evolve.

Okay at least been showing very good growth in our convenience foodservice business and remember some of Thats being delivered out of performance foodservice warehouses.

Out of our core Mark warehouse. So we have these what we call turnkey programs, we haven't been seven several type of cuisines.

And some of that has stopped and a core of our company based on the amount of available freezer and cooler than they have in some instances and that market is only at performance foodservice in some instances except thoughts.

And.

That's the way, we're going to go to market probably for the foreseeable future, we don't see ourselves adding.

Adding a lot of freezer and cooler space.

Those core Mark buildings.

We've seen some slowness.

Opinions.

We think a lot of that has to do with fuel prices.

Just inflation in general as customers are getting used to higher price points.

We have not seen coffee and breakfast come fully back from the pandemic at this point.

And.

The if you look at the core Mark business.

It actually had a very good quarter.

<unk>.

Not the case growth, we have a very large customer that has gone through some changes.

And has experienced some some pretty good declines so thats had an impact but without those inventory gains if we would to take those.

And equalize them. The two years core Mark would've had a double digit increase in EBITDA, they are doing very well and they've actually.

Done the best job of our businesses as far as getting productivity and warehousing and transportation back to pre Covid numbers, we have not been able to do that yet in our foodservice business or our historic business.

Thank you.

Yeah. Thanks Kelly.

And our next question comes from Brian Harper with Morgan Stanley.

Yes. Thank you good morning, guys.

Just to follow up on one of your earlier comments George I think.

In the foodservice business, you had a little bit shy of 7% growth in operating expenses. At this point is that is that mostly driven by what you mentioned, which is just more salespeople or could you talk about.

Some of the puts and takes in other buckets of operating expense.

Yes, I would say, there's three things there.

The first would be increased.

Salesforce.

Unusual for us too.

Be between 8% to 10% more salespeople, so thats been an expense.

Productivity, although improved it's not back to.

Pre COVID-19 levels or I guess, what we would call acceptable levels and then the mix of business that's different.

National account comes with lower operating expenses, particularly on the sales side, but just lower operating expenses from bigger deliveries.

Tend to have a little bit better density.

And that mix is just.

More cost that it takes to handle an independent customer, but as far as our expense ratios in general, though we feel real good about it.

Okay. Thanks.

Just thoughts on the C store side.

In the past, you've sometimes talked about kind of the growth in food in that channel versus the declines in tobacco or are you willing to talk about what that was.

This quarter in <unk>.

As the softness kind of primarily a function of fuel prices like you mentioned or do you think that there is.

Are there specific areas of C store products that people have pulled back on.

Well I think it's two things.

No.

Obviously, the inflation in the cost of fuel had an impact.

But I also think it's that morning day part.

That has not really come back to pre COVID-19 levels.

Sure.

But we've made some changes to our business, where we're going to be better prepared for both coffee and breakfast.

I, just think that as we get deeper into this fiscal year that those two areas will continue to improve.

Tobacco.

I mean, it's been running.

Actually I might turn it to Pat I don't pay that close attention to it but I think it's been running at about 4% to 6% declines in cartons is that about right.

Yes.

Right around that area, yes.

Okay. Thank you.

And we have our next question from Alex Slagle with Jefferies.

Thanks, Good morning.

Expanding on some of the previous questions in case growth in foodservice and convenience and.

I'm just trying to get an idea happening how this decline compares to the previous quarters.

And just how to think about this as we look ahead I mean I'm not sure. This trend has been steady here into the early QQ.

And then just any.

Commentary on the new business pipeline in convenience expected timing of when maybe these customers might come online.

Yes, we will.

See some business that will come online this fiscal year inconvenience, so far in this quarter, it really looks like last quarter.

And really each part of the business I think I'll turn that to Pat to comment on it as well the tips would it looks like to me at this point on the <unk> pipeline.

It's been performing well.

That's on a good job of continuing to work with customers on.

It is a long pipeline. So we know that but we have a lot of really positive things.

And that pipeline.

Okay.

To start can you expand on the new lines of business, where youre seeing accelerated growth and it sounds like youre, highlighting micro markets and fulfillment.

Just to the degree this is a notable inflection or just a continuation of what you were seeing.

The previous quarter.

I would say a continuation micro market just continues to be very strong and what we call a micro kitchen I don't know where that came from but is basically where the employer is giving candy snacks beverages.

Sure sure no cost at all we're seeing more of that and I think a lot of that has to do with people wanting to get the employees back to work and I think thats, a nice enticement to do that as far as our fulfillment business goes that is growing at a very fast rate.

It's a great part of our business is a great part of our future.

I think our service that we're able to give our supplier it is beneficial for both of us.

And.

We've got good systems for it.

We're up to six distribution centers that do that type of fulfillment now so it's a good part of our business and charge offs that I mean, obviously with this our theater saw really strong season with Oppenheimer and Barbie, so that that helps them a lot.

So it just proves that when there is content breadth of content depth of content people.

People will go back to the theaters and that we.

We did see normally go into kind of a lull as people go back to.

A lot of seasonality of theater, there was a nice pickup.

Our Swiss movie.

And but let's say that is.

A channel that does have some seasonality to it and so we work with them on that.

Got it thank you very much.

And we have our next question from John Heimbach <unk> with Guggenheim.

Hey, George two things.

Or do you think.

I'll go on the sales force and.

Related to independent case growth is going forward. Once you normalize this 8% is it.

4% sales force growth, 6% translates into 6%.

Independent case growth is is that the algo and then do you guys have a good sense of where your average independent wallet share is.

Is it 30% more or less.

Yes, okay as far as the sales force.

<unk>.

We haven't done this for a while but I would say that we should be able to grow on a percentage basis about 50% faster than we add people.

So a 4% growth in salespeople should get us a 6%.

Growth as far as.

Cases go.

And then as far as the wallet share we only have one point that we use that gives us a feel for what percentage we have by.

By different types of.

Of customers of course, we look closer at restaurant, because we do very little in healthcare contracts, even your margin.

And typically we're in the low twenties.

As far as the share goes.

And maybe to follow up on that so where does the whole nor the opportunity right seven years ago.

It was <unk> was.

Big hole and the specialists, we're getting more credit for their product then the broad liners were does that is that still true and how do you how do you address that.

We were actually over indexed when you get to the center of the plate and cheese. So.

I can't speak industrywide.

We're index because the numbers, we get are primarily just broad line distributors.

And it doesn't include a lot of the specialty so I'm not so sure that we can answer that question, but if you look at the world of broad line distributors, we are over indexed.

On what we call center of the plate, which we put cheese in there because pizza is a big part of our business.

Okay. Thank you.

Thanks.

And we have our next question from Jeffrey Bernstein with Barclays.

Yes.

Great. Thank you very much.

Two questions. The first one just on the broader restaurant industry. It seems like industry data over the past few months uneven restaurant commentary over the past week or so shows that there was a slowdown.

Sales trends in August and September I think you've corroborated that at least in August but.

Question among investors has really been why.

Obviously, the one angle is the headwinds on the consumer which gets plenty of attention, but the alternative has been maybe the return to some seasonality.

And the fact that many restaurants to talk about <unk>.

A recovery in October after maybe the August and September slowdown I think more are believing that may be a return to seasonality has been the culprit for the.

For the slowdown and Reacceleration, which I think will be encouraging because it would imply that the consumer actually is holding up quite well. So I'm just wondering being that your service. So much of the industry. Your thoughts on that idea that maybe seasonality has been the reason for the recent volatility rather than perhaps consumer headwinds and then I had one follow up.

Yes, I don't see it with seasonality, but kind of preface.

This is our customer base and we're a large company, but we don't have real high shares in Europe pretty fragmented industry.

August.

We'll certainly slower than July slower than September.

Yet our share gains were about the same.

So.

As far as what what the broad line industry produces.

So I don't I don't see it as.

As necessarily a slowdown in the market.

Have not seen an uptick in October really October it looks like the first quarter to us as far as case growth.

And then I think in the chain business.

Absolutely.

If you put all of our chain business together I think we are probably slower than the chain business would be just because of our customer base.

I think we're going to see that change with some of the things we have coming up but right now I think that our group of national accounts.

Probably lean towards the ones that are struggling to grow.

Understood and then just wanted to follow up on the topic of penetration of existing accounts I think George you mentioned that independent cases were up 7% and customer count was up mid 7%.

<unk> overly simplistically I would think it would imply no further penetration of existing accounts.

I think you mentioned you have maybe low 20% penetration of existing accounts. So I'm wondering why that number.

<unk> be higher or at least trend higher I would think your customers would benefit from having less.

Distributors. So I'm wondering if you have initiatives to expand the share with those existing accounts. So it seem like it would be.

Very profitable for you to just be dropping off more product in existing accounts and taking more share from the smaller foodservice competitors. So just wondering your thoughts on that thank you, yes, well couple of things there.

Our penetration isn't <unk>.

20% within our existing accounts, that's within the broad line market information.

Information that we get.

I would suspect that our penetration within our own accounts is much higher than that I think what's encouraging.

Is that people are spending more money in restaurants as I mentioned earlier.

But even though our case count is.

Only very very marginally growing faster.

Our number of accounts or skus within those accounts are growing comparable to what they've grown in the past when we've had.

Better penetration and it's that the existing skus that they are buying or not buying as much and I think that just has to do with.

I think more restaurants out there.

And the consumer having more choices.

The business getting spread across.

More restaurants than before.

Okay.

Understood. Thank you.

Thanks.

And we have our next question from Andrew Wolf with C. L. King.

Thanks, Good morning.

I wanted to follow up on what Jeff was asking about in a slightly different way so.

Can you differentiate or give us the breakdown between.

How much cases are down at the same independent.

Yes.

Your entire independent group cases are down versus.

Being offset by the obviously the increased skus in lines.

They're not the cases were up seven six and accounts are up seven five so.

It's not that they are down, but theyre very flat.

I'm, sorry, George I method same.

At just at your existing customer base right.

Your cases per drop or flat.

Inc.

But thinking about this right.

So that would mean that the.

The independent the average independents is down on cases, and youre getting to the flat.

Drop per stop on existing customer base.

Through penetrate through increased lines.

I was just wondering if you'd say our cases down this and the offset is.

If you could get give us how much the cases per drop are down obviously overall Europe because of the new customers.

Yes, our cases per drop were up very very slightly.

I mean, not even okay.

Alright, Thank you alright.

The second thing I wanted to ask is on the labor productivity variance between core Mark in foodservice.

You know as you analyze that is there something structural between.

How those businesses are just geographic or any other reason or is that something that with best practices.

Management.

<unk> or improvement.

Can be addressed more quickly.

They operate so much there's just such a difference in how they operate in.

In our core Mark in our fulfillment facilities.

A high percentage of the business is pick and pack. It's not full cases. So you have a much wider market of people that desire to do that kind of work or are capable of doing that kind of work.

I think it's probably just simply that it's just going to take a little bit longer from a productivity standpoint.

In foodservice, but we will get there.

Okay.

Got it.

And the last thing is did I hear this right you do you expect the national chain business.

To improve.

Going forward and if so is that kind of do what.

Either you know expansion of opportunities with existing.

Customers are.

It's new it's new business, yes, some of which has already started some starts the first of the calendar year.

And then Les which I don't think would happen unless we saw some real drop off in.

In existing business that will put us.

In positive case growth.

Okay.

Thank you.

And our next question comes from Lauren Silberman with Deutsche Bank.

Thank you congrats on the quarter I wanted to ask about capital allocation you guys bought back.

Year to date stocks trading at a pretty big disconnect that history, even with very strong fundamentals can you just expand on your willingness to further lean on the buybacks and how youre thinking about capital deployment and allocation of buybacks versus M&A.

Yes, Hello, and thank you for that question.

When we think about our capital allocation strategy and yes, we did obviously purchase shares in the last quarter and then we also shared with you our purchases in October.

And when you think about the overall overall allocation strategy as we've always said our number one priority is around capital and building capacity as you can see we continue to grow and we're really happy with the growth that we've seen in the independent cases and some of the other segments. So we will continue to invest there. We're also.

Look real closely are reducing leverage and then also M&A, which we've talked about we are looking at M&A.

The final thing is the share repurchase and we started purchasing shares in Q4, and then we bought them again in Q1, and then again you can see that we're by them in this quarter.

We have a methodology out there we have a framework out there and we think it's working really well you mentioned a couple of key points and Thats why we think it is important to share with you. What we did in October because we think that framework is working exactly how we designed it.

Okay. Thank you for that as you think about M&A can you just talk about your appetite for foodservice acquisitions, Alex Thank you Mark.

Alright.

No.

Our appetite to foodservice is much greater.

We don't see ourselves in the near future buying.

Traditional convenience store distributor.

Our focus is more on foodservice and of course, the foodservice part of convenience, but thats, where our focus is today from an M&A standpoint.

Okay, Great and final one for me is just on convenience can you just breakdown what you saw with inflation in that segment.

Yes.

As we've said I mean, it's largely doing exactly what we've been seeing.

We're in the mid single digits.

One client convenience was running a lot faster down then their star that's kind of caught up and theyre almost exactly a priority, but theyre right in that.

Mid single digit area, just a little higher.

Great. Thank you very much.

And we have our next question from Joshua Long with Stephens, Inc.

Great. Thank you for taking the question George your commentary around the breakfast and coffee.

Dynamics in the convenience trend or the convenience segment were helpful. Curious if you could talk a little bit more about the office coffee business and kind of how that performed.

<unk> returned to Bob returned to outfit trends that continued to play out.

Yes, that's returned quicker actually then than it has in convenience.

And we're seeing good growth right now over the previous year, we are not back quite too.

2019, pre COVID-19 levels, but we're close.

Office coffee is doing very well and I think thats, just a function of more people.

Doing the coffee for free and wanting to get people back to work in.

And once again kind of an enticement.

Got it that's helpful and curious on the capacity investments you made you called out the new distribution center in Virginia.

And then also some investments that youre, making on the last mile delivery just curious if you could contextualize the.

Capital allocation plan for.

Yes. This is investments going forward and kind of how to think about how we could think about that from.

The distribution center perspective, maybe on the foodservice side or.

Additional investments on that last mile delivery, it seems like maybe thats, a little bit easier to rollout.

Across the system, but just curious if you could share some commentary.

Yes, just on the foodservice side.

We'll just keep saying our number one priority is to continue to build capacity into the system and really the focus is on that foodservice segment, where we're building the most capacity in.

We're really excited about the projects that we just launched in Virginia right there in Richmond.

Very nice facility, it's going to do extremely well when they open they got right out of the gate and have performed very well I think we're going to see a lot more type of projects like that where there they bring a lot more efficiency to the system.

To the right size for a really growing the business.

And then on the last mile side.

Yes.

It's a thing we've been doing for a while and we continue to invest behind it obviously, we're really going to be focusing on getting to one day distribution across the country.

But we've made a lot of progress there. So we'll continue to focus on that as well.

That's helpful. Thank you and then one follow up for me as we think back to <unk>.

Thank you our fiscal 'twenty three period can you remind us uptrend performed through the quarter just curious.

Think about restaurants, there was perhaps easier comparisons aircrafts Harrison from a comp perspective, as we go through the prior year quarter, but just curious how that how that trend played out from a case growth perspective on your side.

So just to confirm is cutting out just a little bit are you asking about how the trends were in the prior quarter for foodservice for case growth that's.

That's right yes.

Quarter last year, so just trying to contextualize <unk> 23.

As we start to lap that going forward.

Are you talking about the quarter that we're in now and lobster last year.

Yeah.

Okay.

That's correct.

When I look at our history, it's it looks fairly consistent to me.

Obviously the holiday period.

Other than the holiday weeks themselves are really strong.

As I sit here today I think the quarter is going to look a lot like the quarter, we just left.

Understood. Thank you so much.

And we have our next question from William Reuter with Bank of America.

So the first is.

With regard to increased automation, you mentioned and just star Youre talking about that.

How are you thinking about additional investments going forward in automation in your facilities and I guess, how does that compare your capex. This year, how does it compare to last year's $270 million.

Yes.

We're actually looking at automation.

Definitely the best are but we're actually looking at automation across all three segments Theres a lot of opportunities for us too.

Look at ways to make the buildings more efficient and that could just be automation, but also could be simply just technology, but we are looking at different multi shuttle various other automation. So that we can put into our buildings that just make that pickers job that much more efficient when you talked <unk> a little different there.

They're doing more automation for the.

Pick and pack.

Facilities, and we continue to expand those.

I'm, sorry, I forgot the last part of your question.

It was how does how do you expect capex this year.

B relative to last year's $270 million.

Yes, I mean, we don't provide a number on that but what I can tell you is as we said that's our number one priority for US is to continue to invest in capacity and we are looking at things like automation. So we will continue to spend appropriately behind that to make sure that we can accomplish those two goals.

I guess.

On the automation piece do you expect that there will be a time when you will have labor.

Labor savings that you can essentially reduced the number of employees in the different facilities.

It's not really automation for labor savings in the sense of less people, it's definitely automation for labor savings and a sense of making our picker is much more efficient. So we can just increase the throughput in the buildings I would think about it more like that and the capability to handle more skus.

It's a big part of our automation.

Okay. That's all for me thank you.

And we have our next question from Peter Saleh with BTG.

Great. Thanks, just a couple of questions first on the market share gains with the independents that you guys are seeing.

Are there any specific categories or regions.

We're seeing some outsized share gains there.

If you take.

What we looked at real close of course is our gains.

Gains in independent foodservice business.

The share gains.

Not spread equally but theres not a huge.

Difference from where our gains as the best two where games are the lowest.

I guess, if I had to pick a part of the country I would say.

Probably the northeast is where we've had some outsized.

Share gains.

Got it great and then just on the labor productivity George that you mentioned not back to pre pandemic levels or just not back to I guess acceptable levels. I think is what you had mentioned.

What do you think that's going to take to kind of drive that labor productivity higher is it just now.

Less turnover more tenure better training and do you see benefits on that productivity in FY 'twenty four or is that more of a next year FY 'twenty five type of benefit.

While our productivity and our accuracy has improved as our turnover has gone down.

And as people have climbed kind of at that learning curve, it's a fairly easy job to learn but it takes a while to get real good at it.

And.

We're still climb in that learning curve.

In totality.

We have companies that are doing much better than they did even in 19 and we have companies that are struggling to get there and it's just a reflection of the labor market and the nature of the work.

Thank you very much.

And our next question comes from Jake Bartlett with true Securities.

Great. Thanks for taking the question my mind.

Yes.

Sorry, I'm not sure if anybody else here that noise.

I am one.

Wondering about margin expansion, we expected margin expansion.

In 2004.

Do you expect any contribution from from operating expense leverage or is that really.

All driven by gross margin profits.

It's driven by mix would probably be the number one.

We do expect to see expense ratios get better as we get deeper into the year.

Remember we have a big.

Investment.

Kind of outsized for US right now and our sales force and we still have more productivity gains that we need to get.

But we're not in any way displeased with where our expense ratios are what with what we expected.

And we think we're making wise investments in people.

Got it that makes sense I just look at opera.

<unk> expenses as a percentage of sales has been up for the last I think.

Last four quarters.

I just wanted to confirm that you.

Do you expect to leverage.

On operating expense.

For the remainder of the year by the end of the year to kind of maybe kind of think of operating expense being flat as a percentage of sales and 24 versus 23.

Well.

So many moving pieces with that.

Our mix of business that we have today versus a year ago is a slightly more expensive customer base.

Two surface than what we had a year ago. So that is certainly part of it then when you get into our fulfillment business were.

We don't necessarily.

Financial possession.

Of the product and we're not the one billing.

And user.

Of the product.

Then.

We're just running the gross profit and.

And we're not the sales so that's going to give you artificially high expense ratios because you don't have the full cost of that case to spread those expenses.

It also produces extremely high EBITDA margins because you don't have.

The building of the full case only to service.

To deliver that case to the consumer.

Got it got it that makes sense and just kind of a nitpicky modeling question, but LIFO reserve adjustment it kind of went to a.

A positive adjustment this quarter from negative last quarter, what are the puts and takes.

In terms of the reserve adjustments for the remainder of the year and maybe what drove.

The increase.

Positive adjustment in the first quarter.

Yes.

It's something that just fluctuate around the quarters, we don't really provide any guidance on that going forward.

So I'll just leave it there.

Okay. Thank you so much.

Thanks.

And we have our next question from Edward Kelly with Wells Fargo.

Thanks, guys. Thanks for letting me back on.

Just a couple quick ones for you.

Working capital.

How do you think working capital plays out this year from a cash flow perspective, it's been a drag the last few years definitely larger than it would normally be from you guys.

More neutral last week, I think it would be and this year.

And then there is $215 million in M&A this quarter, maybe I missed it I talked about that.

Just any color there. Thank you.

Sure our networking capital Ed I mean, we continue to see improvements there. So we do think that will continue to improve throughout the year.

And as I mentioned, we periodically from time to time make investments.

And like we did this past quarter in inventory, but that's opportunistic so those do come into play occasionally and then on M&A, we did make a.

It's an immaterial acquisition.

Had but it was very strategic to what we're doing with convenience and food and foodservice. So we feel really good about it but it's immaterial to our overall financial results.

Okay. Thank you.

And we have reached our allotted time for our Q&A session. Today I would now like to turn the call back over to Bill Marshall for closing remarks.

Thank you for joining our call today, if you have any follow up questions. Please contact us at Investor Relations.

Thank you. This does conclude today's program. Thank you for your participation you may now disconnect.