Q2 2024 Performance Food Group Co Earnings Call
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Operator: Stand by, your program is about to If you need assistance during today's program, please press star zero. Good day and welcome to PFG's Fiscal Year Q2 2024 Earnings Conference. If you would like to ask a question at the, for A C O N D D C O N D C O N D C O N D C O N D C O N D C O Please press the star key followed by the number one on your telephone keypad at any, I would now like to turn the call over to Bill Marshall, Vice President and Vestal Relations for PFD. Go ahead.
Please standby your program is about to begin.
If you need assistance during todays program. Please press star zero.
Speaker Change: Good day and welcome to Pfg's fiscal year, Q2, 2024 earnings conference call.
Speaker Change: If you would like to ask a question at the conclusion of the prepared remarks. Please press the star key followed by the number one on your telephone keypad at any time.
Speaker Change: I would now like to turn the call over to Bill Marshall Vice President Investor Relations for PFG. Please go ahead.
Speaker Change: Yeah.
Bill Marshall: Thank you and good morning. We're here with George Holm, PFG CEO, and Patrick Hatcher, PFG CFO. We issued a press release this morning regarding our 2024 fiscal second quarter results, which can be found in the Investor Relations section of our website at pfgc.com. During our call today, unless otherwise stated, we are comparing results to the results for 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.
Bill Marshall: Thank you and good morning, we're here with George Holm, Pfg's, CEO and Patrick Hatcher Pfg's CFO.
Bill Marshall: Issued a press release this morning regarding our 2020 for fiscal second quarter results, which can be found in the Investor Relations section of our website at <unk> Dot com.
Bill Marshall: During our call today, unless otherwise stated we're comparing results to the results in the same period in fiscal 2023.
Bill Marshall: The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items.
Bill Marshall: Conciliation of these non-GAAP measures to the corresponding GAAP measures can be found in the back of the earnings release as.
Bill Marshall: 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.
Bill Marshall: As a reminder, in the fiscal first quarter of 2023, we updated our segment reporting metrics for adjusted EBITDA from the prior EBITDA metric.
Bill Marshall: Our remarks on this call and in the earnings release contain forward looking statements and projections of future results.
Bill Marshall: These review the cautionary forward looking statements section in today's earnings release and our SEC.
Bill Marshall: The 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.
George L. Holm: Thanks, Bill. Good morning, everyone, and thank you for joining us on our call. I'm excited to share our fiscal second quarter 2024 results with you today, which were strong and accelerated into the close of the calendar year. Building on a strong start to our fiscal year, second quarter results came in at the high end of the expectations we announced three months ago. Once again, we saw broad strengths across our business units, with strong momentum in our high-margin focus area. This morning, I will review our business performance and discuss some recent trends we have seen in the market. Patrick will review our financial performance and outlook for the remainder of the fiscal year. Then we look forward to taking your questions.
George L. Holm: Thanks, Bill good morning, everyone and thank you for joining our call today I'm excited to share our fiscal second quarter 2024 results with you today, which were strong and accelerated into the close of the calendar year.
George L. Holm: Building on a strong start to our fiscal year second quarter results came in at the high end of the expectations, we announced three months ago.
George L. Holm: Once again, we saw broad strength across our business units with strong momentum in our high margin focus areas. This morning, I will review our business performance and discuss some recent trends we have seen in the market.
George L. Holm: Patrick will review, our financial performance and outlook for the remainder of the fiscal year and we look forward to taking your questions.
George L. Holm: Last quarter, we discussed our strategic focus on being a leader in the food away from home, with broad exposure to a variety of channels and products. We believe that our position in the market produces consistent growth across our top and bottom lines and provides resilience in times of different economic conditions. The second quarter was an excellent example of this, with each of our business segments contributing to our performance. Let's begin with our food service segment. We are pleased with how food service continues to perform, with accelerating case volume growth across both independent and chain restaurants. The outstanding case performance drove sales growth in the quarter despite another period of modest deflation. We'll provide more detail about our inflation expectations in a moment. Independent case volume accelerated from the fiscal first quarter, growing 8.7% year-over-year in the second quarter due to a very strong finish and a Favorable Calendar.
Last quarter, we discussed our strategic focus on being a leader in the food away from home industry with broad exposure to a variety of channels and products, we believe that our position in the market produces consistent growth.
George L. Holm: Cross, our top and bottom lines and provides resiliency during different economic conditions the.
George L. Holm: The second quarter was an excellent example of this with each of our business segments contributing to our performance.
George L. Holm: Let's begin with our foodservice segment, we are pleased with how foodservice continues to perform with accelerating case volume growth across both independent and chain restaurants.
George L. Holm: The outstanding case performance drove sales growth in the quarter. Despite another period of modest deflation, we will provide more detail about our inflation expectations in a moment.
George L. Holm: Independent case volume accelerated from the fiscal first quarter growing eight 7% year over year in the second quarter due to a very strong finish.
George L. Holm: And favorable calendar, we have consistently grown our market share in the independent restaurant space, which remains an important component of our long term profit growth aspirations.
George L. Holm: We have consistently grown our market share in the independent restaurant space, which remains an important component of our long-term profit growth aspiration. The increased headcount within our sales force is certainly an important factor. However, I cannot overstate the quality and the hard work they contribute to PFG every day.
The increased head count within our sales force is certainly an important factor.
George L. Holm: However, I cannot overstate the quality of these individuals and the hard work.
George L. Holm: They contribute to PFG every day their performance is supported by our Companys rigorous training emphasis on product knowledge and the development of relationships.
George L. Holm: Their performance is supported by our company's rigorous training, emphasis on product knowledge, and the development of relationships. PSG has been building and maintaining this area of our business for decades. In our view, this emphasis is a key driver of our independent performance, and we expect this to provide continued momentum in the quarters ahead. As we've discussed in the past several earnings calls, new account growth has been the main driver of case growth in the independent channel. This largely continued in the fiscal second quarter with active independent customers increasing by nearly 8% over the prior year. However, we did begin to see improved penetration within existing accounts, particularly in November and December.
George L. Holm: She has been building and maintaining this area of our business for decades, and our view of this emphasis is a key driver of our independent performance and we expect this to provide continued momentum in the quarters ahead.
George L. Holm: As we've discussed in the past several earnings calls new account growth has been the main driver of case growth in the independent channel. This largely continued in the fiscal second quarter with active independent customers, increasing by nearly 8% over the prior year.
George L. Holm: However, we did begin to see improved penetration within existing accounts, particularly in November and December.
George L. Holm: In fact, sales to existing customers increased more in December on a year-over-year basis than we have seen since January of last year. We are optimistic that growing business with our existing customers will become a more important piece of our case growth. Last quarter, we highlighted the sequential performance of our chain, and we're optimistic that we could see positive case growth over the next several quarters. We are pleased to see that chain business continue to accelerate sequentially, swinging to positive case growth in the fiscal second quarter. The growth in our chain business was mostly driven by improved performance of our existing customers with a small contribution from new accounts, as you are aware. We have produced several excellent results in our food service business despite several quarters of deflationary pressure. Sequentially, deflation moderated in the fiscal second quarter compared to the fiscal first quarter, as we had expected, while the moderation was slightly less than we had originally anticipated.
George L. Holm: In fact sales to existing customers increased more in December.
Year over year basis, and we have seen since January of last year, we are optimistic that growing business with our existing customers will become a more important piece of our case growth trends last quarter. We highlighted the sequential performance of our chain business and we're optimistic that we could see positive case growth over the next several.
George L. Holm: Quarters, we are pleased to see that chain business continued to accelerate sequentially swinging to positive case growth in the fiscal second quarter. The growth in our chain business was mostly driven by improved performance of our existing customers with a small contribution from new accounts.
George L. Holm: As you are aware.
George L. Holm: We have produced several excellent results in our foodservice business, despite several quarters of deflationary pressure.
George L. Holm: Sequentially deferred.
George L. Holm: <unk> moderated in the fiscal second quarter compared to the fiscal first quarter as we had expected while the moderation was slightly less than we did in <unk>.
George L. Holm: Originally anticipated.
George L. Holm: Our strong case performance and positive mix shift offset the deflationary pressure, resulting in gross profit improvement in the quarter. As we turn our attention to the back half of 2024, we continue to expect moderating deflation to turn to very slight inflation by the time we reach the end of the fiscal year. We are extremely proud of how our food service business has performed and believe it will continue to be the engine for our profit growth over time. Turning to Vistar, we were very pleased with the results in the fiscal second quarter.
George L. Holm: A strong case performance and positive mix shift offset the deflationary pressure, resulting in gross profit improvement in the quarter.
George L. Holm: As we turn our attention to the back half of 2024, we continue to expect moderating deflation turned very slight in place by the time, we reach the end of the fiscal year.
George L. Holm: We are extremely proud of our foodservice business has performed and believe it will continue to be the engine for our profit growth overtime.
George L. Holm: Turning to <unk>, we were very pleased with results in the fiscal second quarter.
George L. Holm: Vistar is an important growth engine for our company and has consistently produced strong top and bottom line results. As we discussed on last quarter's earnings call, this store did have a difficult comparison in the fiscal second quarter due to higher than typical inventory holding gains last year. They were able to successfully overcome this hurdle and grow bottom-line results during the period. One of Vistar's strengths is the ability to compete in a wide variety of channels, selling a broad range of products.
<unk> is an important growth engine for our company has consistently produced strong top and bottom line results.
George L. Holm: As we discussed on last quarter's earnings call. Just start did have a difficult comparison in the fiscal second quarter due to higher than typical inventory holding gains last year they were <unk>.
George L. Holm: Well to successfully overcome this hurdle and grow bottom line results in the period.
George L. Holm: One of the stars strength is the ability to compete in a wide variety of channels selling the broad range of products. This diversity helped once again in fiscal second quarter, allowing the segment should produce high single digit sales growth.
George L. Holm: This diversity helped once again in fiscal second quarter, allowing the segment to produce high single-digit sales. Star saw particularly strong sales results in the important vending, office coffee, and office supply categories. One of the key drivers of the top line performance was a continued improvement of fill rates, both inbound and outbound. As you may remember, VISTAR still rates have been slower to recover than our food service, but we are pleased to see gains in this area. This store has continued to enhance its e-commerce platform, which we believe will offer further growth potential through this channel enable us to increase sales to existing customers as well as open new lines of business directly to consumers. This store has a strong pipeline of new business, so we were excited about that.
George L. Holm: <unk> saw particularly strong sales results and the important vending office coffee and office supply channels. One of the key drivers of the topline performance was the continued improvement of fill rates, both inbound and outbound.
George L. Holm: As you May remember a discharge still rates have been slower to recover than our foodservice business and we are pleased to see gains in this area.
George L. Holm: This store has continued to enhance their e-commerce platform, which we believe will offer further growth potential.
George L. Holm: In this channel and enable us to increase sales to existing customers as well as open new lines of business directly to consumers.
George L. Holm: <unk> has a strong pipeline of new business and we're excited about the future.
George L. Holm: Finally, our convenience business has powered through a difficult macroeconomic environment to produce very strong bottom-line results, on the top line or core mark operations continue to win new business, and Outperform the Broader C-Score Land, particularly in the largest and most important. And particularly, Cormark has been able to outperform in the food service and in snack areas of the convenience store. While top-line growth is not quite as robust as we might like, Formalk has shown its ability to enter the market and take share from competition. We believe that inflationary pressure, both inside the convenience store and at the gas pump, has kept consumer demand muted over the past several quarters.
George L. Holm: Finally, our convenience business is powered through a difficult macro economic environment to produce very strong bottom line results.
George L. Holm: On the top line or a core mark operations continue to win new business and outperformed the broader C scored landscape.
Particularly in the largest and most important channels and particularly corn market has been able to outperform in foodservice and in snack areas compete business. While top line growth is not quite as robust as we might like for Mark has shown their ability to win market and take share from competition we.
George L. Holm: Believe that inflationary pressure both inside the convenience store and the gas pump has kept consumer demand and use it over the past several quarters over time, we expect this to normalize and allow topline trends to revert to historic growth rates in the convenient space.
George L. Holm: Over time, we expect this to normalize and allow top line trends to revert to historic growth rates in the convenience store. Meanwhile, Cormark has done an outstanding job capturing efficiencies on the operating income line, particularly in the workforce. Kormark's operating expense attrition fees are attributed to record low temporary workers and overtime, which has decreased by approximately half from Q2 of 2023. A stable full-time workforce has several long-term advantages, including fewer picking errors, lower levels of shrink, and higher worker productivity.
George L. Holm: Meanwhile, core Mark has done an outstanding job capturing efficiencies on the operating income line, particularly and workforce productivity.
George L. Holm: <unk> operating expense efficiencies are attributed to record low temporary workers and overtime expense, which has decreased by approximately half from Q2 of 2023.
George L. Holm: A stable full time workforce of several long term advantages, including fewer picking airs lower levels of shrink and higher worker productivity.
George L. Holm: As a result of these efficiencies, the convenience segment experienced 20% adjusted EBITDA growth in the quarter. This profit performance is despite lower inventory holding gains on a year over year basis. Through the remainder of fiscal 2024, we anticipate inventory holding gains to moderate to a normal level. Still, our convenience segment's profit momentum is strong due to the excellent management of underlying costs. Mark's ability to deliver both traditional convenience store goods as well as broad line food service expertise and capability has enabled us to capture additional business opportunities since the. We have expanded our capabilities to incorporate additional branded concepts, including various cuisine types, such as Hispanic fried chicken and We have used our strong brand equity in several of our performance brands, including Contigo, Perfectly Southern Fried Chicken, Red Seal Pizza, and True Q Barbecue.
George L. Holm: As a result of these efficiencies the convenience segment experienced 20% adjusted EBITDA growth in the quarter.
George L. Holm: This profit performance is despite lower inventory holding gains on a year over year basis through the remainder of fiscal 2020 quarter, we anticipate inventory holding gains to moderate to a normal level.
George L. Holm: Our convenience segment profit momentum is strong due to the excellent management of underlying cost items.
George L. Holm: <unk> ability to deliver both traditional pvs drunkards as well as broad line foodservice expertise and capabilities has enabled us to capture additional business opportunities since the acquisition.
George L. Holm: We have expanded our capabilities to incorporate additional branded concepts, including various cuisine types such as Hispanic fried chicken and barbecue we have used our strong brand equity in several of our performance brands, including <unk> perfectly southern fried chicken Red seal pizza and <unk> barbecue.
George L. Holm: We believe that these programs help to drive our strong sales pipeline and expect them to result in additional business in the years ahead. Before turning to Patrick, who will discuss our results and specific drivers for performance and then provide more color on our guidance for 2020 and beyond, I want to leave you with a few key messages from our second quarter results and expectations. We believe that PFG's position as a leader in the growing food away from home market will enable us to consistently grow our sales and profits over the long term, resulting in additional shareholder value.
George L. Holm: We believe that these programs helped to drive our strong sales pipeline and expect them to result in additional business in years ahead.
Speaker Change: Before turning to Patrick who will discuss our results and specific drivers of our performance and then provide more color on our guidance for 2024 and beyond I wanted to leave you with a few key messages from our second quarter results and expectations for the future.
Patrick Hatcher: We believe that Pfg's position as a leader in the growing food away from home market will enable us to consistently grow our sales and profit.
Over the long term, resulting in additional shareholder value.
George L. Holm: Our Commitment to Invest in New Fiscal Capacity and Customer-Facing Employees has produced market share gains in the highly profitable channels in which we compete. Our broad channel exposure gives us access to significant white space opportunities that we believe insulates our business from changes in the external macroeconomic climate. We are excited about what the future holds and appreciate your interest. I will now turn it over to you.
Patrick Hatcher: Our commitment to invest in new physical capacity and customer facing employees. That's produced market share gains in the highly profitable channels in which we compete our broad channel exposure gives us access to a significant white space opportunities that we believe insulates our business from changes in the external macro.
Economic climate.
Speaker Change: We are excited for what the future holds and appreciate your interest I will now turn it over compatriot.
Patrick Hatcher: Thank you, George, and good morning. I'd like to start this morning by reviewing our financial performance for the fiscal second quarter of 2024 and commenting on PFT's financial position and capital allocation priorities. I'll then review our outlook for the remainder of fiscal 2024 and discuss some key drivers embedded in our guidance. We'll then be happy to take any questions you have during the Q&A portion of the call. As you saw in our press release this morning, PFG delivered strong results during the fiscal second quarter, building on the momentum from our first quarter. We were particularly pleased with how we closed the calendar year during the important holiday selling season, which experienced accelerated growth.
Speaker Change: Thank you charge and good morning, everyone I'd like to start this morning by reviewing our financial performance for the fiscal second quarter of 2024, and commenting out pfg's financial position and capital allocation priorities.
Speaker Change: I will then review our outlook for the remainder of fiscal 2024 and discuss some key drivers embedded in our guidance.
Speaker Change: We will then be happy to take any questions you have during the Q&A portion of the call.
Speaker Change: As you saw on our press release. This morning, PFG delivered strong results during the fiscal second quarter built.
Speaker Change: Building on the momentum from our first quarter.
Speaker Change: We were particularly pleased with how we closed the calendar year during the important holiday selling season, which experienced accelerated growth.
Patrick Hatcher: In the fiscal second quarter of 2024, PFG generated total net sales of $14.3 billion, a 2.9% increase year over year. Our revenue was at the upper end of the guidance range we laid out last quarter, and we are very pleased with this result. Our sales performance was driven by a 2.1% increase in total case volume growth. Our case performance was boosted by an acceleration in independent restaurant case growth, which increased 8.7% in the quarter. This result was more than a full percentage point higher than the prior two fiscal quarters, highlighting the solid momentum in this area of our business. As George mentioned, we attribute this strength and resulting market share gain to investment in our growing outstanding sales. I'm also pleased to report that case volume to chain restaurants grew in the fiscal quarter after several consecutive quarters of decline.
Speaker Change: In the fiscal second quarter of 2020 for PFG generated total net sales of $14 3 billion.
Speaker Change: A two 9% increase year over year.
Speaker Change: Our revenue was at the upper end of the guidance range, we laid out last quarter and we are very pleased with this result.
Speaker Change: Our sales performance was driven by a two 1% increase in total case volume growth.
Speaker Change: Our case performance was boosted by an acceleration independent restaurant case growth.
Speaker Change: Which increased eight 7% in the quarter.
Speaker Change: This result was more than a full percentage point higher than the prior two fiscal quarters.
Speaker Change: Highlighting the solid momentum in this area of our business.
As George mentioned, we attribute this strength and resulting market share gains for our investment in our growing outstanding sales force.
Speaker Change: I'm also pleased to report that case volume to chain restaurants grew in the fiscal quarter after several consecutive quarters of decline.
Patrick Hatcher: As we discussed in our last earnings call, our chain performance has improved sequentially as a result of improvements in some of our key accounts and New Business. It's rewarding to see this area of our business move back towards positive growth, creating a powerful combination with our independent strength. We expect to continue to add new accounts to our chain business, emphasizing profitability as we partner with strong and growing restaurants. Total PFG gross profit increased 6.6% in the fiscal second quarter to $1.6 billion.
Speaker Change: As we discussed in our last earnings call. Our chain performance had improved sequentially as a result of improvements in some of our key accounts.
Speaker Change: And new business wins is rewarding to see this area of our business move back towards positive growth, creating a powerful combination with our independent strength, we expect.
Speaker Change: To continue to add new accounts to our chain business emphasizing profitability as we partner with strong and growing restaurants.
Speaker Change: <unk> gross profit increased six 6% in the fiscal second quarter to one $6 billion.
Patrick Hatcher: While positive makeshift continues to drive gross profit growth and margin expansion for PF, while deflation and food service moderated in the second quarter compared to the first quarter, it remains a modest headwind. Our gross profit performance in the quarter once again reflects our ability to produce solid profit growth despite the deflationary backlash. Total company inflation increased slightly in the fiscal second quarter due to moderating deflation in the food service segment I just mentioned. This offsets the slowing rates of year-over-year inflation at both the Vistar and convenience segments. Public company product cost inflation was 3.6% in the fiscal second quarter, up half a percentage point sequentially from the fiscal first quarter.
Speaker Change: Positive mix shift continues to drive gross profit growth and margin expansion for PFG.
Speaker Change: While deflation in foodservice moderated in the second quarter compared to the first quarter. It remains a modest headwind or.
Speaker Change: Our gross profit performance in the quarter once again reflects our ability to produce solid profit growth. Despite the deflationary backdrop.
Speaker Change: Total company inflation increased slightly in the fiscal second quarter due to moderating deflation in the foodservice segment that I just mentioned.
Speaker Change: This offset the slowing rates of year over year inflation at both the Vista and convenience segments.
Speaker Change: Public company product cost inflation was three 6% in the fiscal second quarter.
Speaker Change: Up half a percentage point sequentially from the fiscal first quarter.
Speaker Change: Deflation in the foodservice segment moderated to 4% in the fiscal second quarter compared to two 3% deflation in the fiscal first quarter.
Speaker Change: As expected <unk> inflation continued to slowly trend lower in the quarter. So it remains elevated compared to historic norms.
Patrick Hatcher: Deflation in the food service segment moderated 2.4% in the fiscal second quarter compared to 2.3% deflation in the fiscal first quarter. As expected, Fistar inflation continued to slowly trend lower in the quarter, though it remains elevated compared to historic norms. Vistar finished the second quarter with inflation just below 7%. The convenience segment is experiencing a similar dynamic with 7.5% inflation in the fiscal second quarter. Looking ahead, we continue to expect food service deflation to move toward inflation by the end of the fiscal year, with Fistar and convenience inflation settling in at a more normal low to mid single-digit range. These are the assumptions in our fiscal 2024 guide. First profit per case was up 29 cents in the second quarter as compared to the prior year's period.
Speaker Change: <unk> finished the second quarter with inflation just below 7%.
Speaker Change: The convenience segment is experiencing a similar dynamic with seven 5% inflation in the fiscal second quarter.
Speaker Change: Looking ahead, we continue to expect foodservice deflation to move toward.
Speaker Change: Inflation by the end of the fiscal year with.
Speaker Change: With fifth star and convenience inflation settling in at a more normal low to mid single digit range.
Speaker Change: The assumptions in our fiscal 2020 forward guidance.
Speaker Change: Gross profit per case was up 29 in the second quarter as compared to the prior year's period.
Speaker Change: Our ability to increase gross profit at this rate is an important factor in our bottom line growth.
Speaker Change: You will see in our earnings release, our operating expense did increase at a mid single digit pace in the fiscal second quarter.
Speaker Change: This increase was mostly due to higher personnel expense and an increase in insurance costs higher personnel expenses, partly a factor of our larger workforce to match our increase in demand.
Speaker Change: These increases were partially offset by increased productivity. We expect these improvements to continue in future periods as we steadily capture opportunities to become more efficient, particularly in the areas of warehouse and delivery.
Patrick Hatcher: Our ability to increase gross profit at this rate is an important factor in our bottom line growth. As you will see in our earnings release, our operating expense did increase at a mid-single-digit pace in the fiscal second quarter. This increase is mostly due to higher personnel expenses and an increase in insurance; higher personnel expenses are partly a factor of our larger workforce to match our increase in demand. These increases were partially offset by increased productivity. We expect these improvements to continue in future periods as we steadily capture opportunities to become more efficient, particularly in the areas of warehouse and delivery. In our second quarter, PFG reported net income of $78.3 million, a 10% increase year over year. Adjusted EBITDA increased nearly 12% to $345 million. Our adjusted EBITDA result was at the very top end of the guidance we provided last quarter. The looted earnings per share in the fiscal second quarter was $0.50.
Speaker Change: And our second quarter PFG reported net income of $78 3 million or 10%.
Speaker Change: Rent increase year over year.
Speaker Change: Adjusted EBITDA increased nearly 12% to $345 million.
Speaker Change: Our adjusted EBITDA result was at the very top end of the guidance, we provided last quarter.
Speaker Change: Diluted earnings per share in the fiscal second quarter was 50.
Speaker Change: An increase of eight 7%, while adjusted diluted earnings per share was <unk> 90.
And eight 4% increase year over year.
Speaker Change: We did see a higher effective tax rate in the fiscal second quarter of 29, 9%.
Which is due to an increase in non deductible expenses and state and foreign taxes as a percentage of our income.
Speaker Change: Turning to our guidance.
Speaker Change: For the fiscal third quarter of 2024, we expect net sales to be in the range of 14% to $14 3 billion.
Speaker Change: And adjusted EBITDA to be in a range of $310 million to $330 million.
Speaker Change: Keep in mind that the fiscal third quarter is typically the smallest quarter in our fiscal year due to relatively light industry volume in January and February.
Patrick Hatcher: An increase of 8.7%, while adjusted diluted earnings per share was $0.90, and an 8.4% increase year over year. We did see a higher effective tax rate in the fiscal second quarter of 29.9%, which is due to an increase in non-deductible expenses and state and foreign taxes as a percentage of our income, according to our guidance. For the fiscal third quarter of 2024, we expect net sales to be in the range of $14 to $14.3 billion and adjusted EBITDA to be in a range of $310 to $330 million. Keep in mind that the fiscal third quarter is typically the smallest quarter in our fiscal year due to relatively light industry volume in January and February. A couple of thoughts on the assumptions we have applied to our fiscal third quarter outlook. First, as expected, the food service segment continued to experience mild deflation in the fiscal second quarter.
Speaker Change: A couple of thoughts on the assumptions, we have applied to our fiscal third quarter outlook first as expected. The foodservice segment continues to experience mild deflation in the fiscal second quarter. We continue to expect this deflation to move towards flat during the fiscal third quarter, although the pace of this improvement may be a bit slower than we originally anticipated.
Speaker Change: Peyton.
Speaker Change: Second we closed out our fiscal second quarter with significant momentum bad weather in early January resulted in an impact to our volume and sales results.
Speaker Change: Typically January is a very small month. So we do not believe that the weather will result in a significant impact to our full third quarter.
Speaker Change: However, we are mindful of the slower start to the calendar year than we had originally expected.
Speaker Change: Despite these challenges we are reaffirming our full year fiscal 2020 forward guidance.
Speaker Change: We continue to expect net sales to be in the range of 59% to $60 billion.
Speaker Change: And adjusted EBITDA to come in at the Upper end of our previously announced $1 45 to $1 $5 billion range.
Speaker Change: We're currently tracking sales at the lower end of the $59 billion to $60 billion range. So we do expect to have a strong fiscal fourth quarter.
Patrick Hatcher: We continue to expect this deflation to move towards flat during the fiscal third quarter, although the pace of this improvement may be a bit slower than we originally anticipated. Second, while we closed out our fiscal second quarter with significant momentum, bad weather in early January resulted in an impact on our volume and sales results. Typically, January is a very small month, so we do not believe that the weather will result in a significant impact on our full third quarter. However, we are mindful of the slower start to the calendar year than we originally expected. Despite these challenges, we are reaffirming our Foliar Fiscal 2024 Guidelines.
Speaker Change: We are also reiterating our long term outlook, which projects net sales to be in the $62 billion to $64 billion range in the fiscal 2025.
Adjusted EBITDA is expected to be comfortably within the one five to $1 $7 billion range in fiscal 2025.
Speaker Change: As you can see from our outlook for the next two fiscal years, we are confident in Pfg's current trajectory and believe that our business is on solid footing.
Speaker Change: I'd like to conclude our prepared remarks today with our financial position, including our cash flow generation balance sheet and capital allocation priorities over the first six months of the fiscal 2020 for PFG generate strong operating and free cash flow operating cash flow was $554 million.
Patrick Hatcher: We continue to expect net sales to be in the range of $59 to $60 billion, and Justin Iveda to come at the upper end of our previously announced $1.45 to $1.5 billion range. We're currently tracking sales at the lower end of the $59 to $60 billion range. So we do expect to have a strong fiscal fourth quarter. We are also reiterating a long-term outlook, which projects net sales to be in the 62 to 64 billion dollar range in fiscal 2025, and adjusted EBITDA is expected to be comfortably within the 1.5 to 1.7 billion dollar range in fiscal 2025. As you can see from our outlook for the next two fiscal years, we are confident in PFG's current trajectory and believe that our business is on solid footing.
Speaker Change: In the first six months of fiscal 2024, an increase from $424 5 million.
Speaker Change: Over the first six months of fiscal 2003 due to improvement in working capital and higher operating income.
Speaker Change: After investing about $147 million in capital expenditures PFG generated $406 9 million of free cash flow investing.
Speaker Change: Investing in our business remains the top priority, including growth projects to build additional capacity to support our long term growth aspirations.
Speaker Change: After capital expenditures, we have three main uses for our additional cash flow, including M&A leverage reduction and share repurchases.
Speaker Change: We evaluate these decisions based upon the value we see each would create for our shareholders and strategically deploy capital towards this year.
Speaker Change: Our share repurchase program can serve as the value of our stock as well as the relative valuation compared to historic levels.
Patrick Hatcher: I'd like to conclude our prepared remarks today with our financial position, including our cash flow generation, balance sheet, and capital allocation priorities. For the first six months of fiscal 2024, PFG generates strong operating free cash. Operating cash flow was $554 million in the first six months of fiscal 2024, an increase from $424.5 million in the first six months of fiscal 23 due to an improvement in our working capital and higher operating income. After investing about $147 million in capital expenditures, PFG generated $406.9 million of free cash.
In the fiscal second quarter, AFG repurchased 8 million shares for a total of $50 million for an average cost of $58 and a penny per share. We are confident in our long term prospects and reflect this through share repurchases.
Speaker Change: We also continue to look at strategic M&A as another avenue of shareholder value creation.
Speaker Change: We are proud of Pfg's track record completing and integrating acquisitions throughout our history.
Speaker Change: Team is continuously working to identify interesting opportunities, while remaining disciplined on price and strategic fit.
Speaker Change: Finally, we have focused our efforts on maintaining a healthy balance sheet, we closed the quarter just below the midpoint of our two and a half to three five times net debt to adjusted EBIT target and feel very comfortable in this range.
Speaker Change: We 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.
Speaker Change: At the close of the fiscal second quarter of 2020 for 80% of our total outstanding debt was at a fixed rate, including these swap contracts.
Patrick Hatcher: Investing in our business remains the top priority, including growth projects to build additional capacity to support our long-term growth aspirations. After capital expenditures, we have three main uses for our additional cash flow, including M&A, leverage reduction, and share repurchase. We evaluate these decisions based upon the value we see each would create for our shareholders and strategically deploy capital towards this view. For example, our share repurchase program considers the value of our stock as well as its relative valuation compared to a historic level. In the fiscal second quarter, PFG repurchased 0.8 million shares for a total of $50 million, for an average cost of $58 and a penny per share.
Pleased that our current level of debt provides ample flexibility to fund our ongoing operations, while leaving room for the capital allocation priorities I just highlighted.
Speaker Change: To summarize PFG finished calendar 2023 with a strong fiscal second quarter. We believe our business is well positioned to achieve strong results. Despite changes in the macroeconomic environment and we are investing in the long term success of our organization and our shareholders.
Speaker Change: For your time today, we appreciate your interest in performance food group and with that we'd be happy to take your questions.
Speaker Change: At this time, if you would like to ask a question. Please press the star and one on your telephone keypad now.
Patrick Hatcher: We are confident in our long-term prospects and reflect this through share repurchase. We also continue to look at strategic M&A as another avenue of shareholder value creation. We are proud of PFT's track record of completing and integrating acquisitions throughout our history. The team is continuously working to identify interesting opportunities while remaining disciplined on price and strategic fit. Finally, we have focused our efforts on maintaining a healthy balance, closing the quarter just below the midpoint of our two and a half to three and a half times net debt to adjusted EBITDA target. I feel very comfortable in this range.
Speaker Change: You may remove yourself from the queue at any time by pressing star two.
Speaker Change: Once again that is star one if you'd like to ask a question.
Speaker Change: We'll pause for just a moment to allow questions to queue.
Speaker Change: And we do have our first question from Jake Bartlett with <unk> Securities.
Jake Rowland Bartlett: Great. Thank you so much for taking the question.
Jake Rowland Bartlett: My question was on the cadence of the sales and the EBITDA guidance in the third quarter and the fourth you mentioned weather, but you also mentioned that it wasn't going to have very large of an impact given how small.
Jake Rowland Bartlett: January is.
Speaker Change: So the question is what gives you so much confidence that sales growth will accelerate.
Speaker Change: In the fourth quarter by my math, it's about 6% growth at the low end of guidance in the fourth quarter up from call. It two 5% to 3% in the third so one what gives you confidence in that level of acceleration.
Patrick Hatcher: We also carefully consider the balance between fixed rate and floating rate debt and use interest rate swaps to convert a portion of our ABL balance to a fixed rate. At the close of the fiscal second quarter of 2024, 80% of our total outstanding debt was at a fixed rate, including the swap contract. We believe that 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, PFT finished calendar 2023 with a strong fiscal second quarter. We believe our business is well positioned to achieve strong results despite changes in the macroeconomic environment, and we are investing in the long-term success of our organization and our shareholders. Thank you for your time today.
Speaker Change: Yeah.
Speaker Change: Well momentum and our independent business.
Speaker Change: Is a big help.
Speaker Change: We have new business coming in our national account area that starts.
Speaker Change: Anywhere from the beginning of the fourth quarter and some of it starts in May and the same in our core business we have.
Speaker Change: Some new business that we've already signed up but we know who is coming in so those are the things that.
Speaker Change: That gives us confidence as we get into the fourth quarter.
Speaker Change: Okay. Okay.
Speaker Change: Sure. Thanks, sorry, because it's going to add what we're really trying to make sure that we gave you guys. Some clarity on the cadence of Q3 to Q4.
Speaker Change: Yeah.
Speaker Change: Got it.
Speaker Change: The third quarter is impacted by weather, but not buying.
Speaker Change: Much is there any way you can kind of quantify how much.
Operator: 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 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing start.
Speaker Change: In January it's done.
Speaker Change: How much of an impact do you think January was through the quarter as a whole.
Speaker Change: January was a significant impact.
Speaker Change: Slow months.
Speaker Change: We're glad to be doing this quarter having.
Speaker Change: We can February under our belt once we got past the bad weather, which is really just California now things were right back to normal.
Jake Rowland Bartlett: And once again, that is star and one if you'd like to ask a question, lots of questions. And we do have our first question from Jake Bartlett. Hey, thank you so much for taking the question. You know, my question was on the cadence of sales and the EBITDA guidance for the third quarter and the fourth. You mentioned weather, but you also mentioned that it wasn't going to have a very large of an impact given how small January is. So the question is, what gives you so much confidence that sales growth will accelerate in the fourth quarter? By my math, it's about 6% growth at the low end of guidance in the fourth quarter, up from, you know, call it 2.5% to 3% in the third. So what gives you confidence in that level of acceleration?
Speaker Change: Our case growth was back to normal so.
Speaker Change: We've got nine weeks to make up for a difficult four weeks.
Speaker Change: We want to communicate that.
Speaker Change: That does have an impact on our third quarter, but March is so critical to two Q3.
Speaker Change: We don't have full insight into what impact it would have on US January is always a low EBITA month for us.
Speaker Change: No.
Speaker Change: Great I appreciate it I'll pass it on thank you.
Speaker Change: And we do have our next question from Mark Carden with UBS.
Mark Carden: Great. Thanks, so much for taking the question so I wanted to dig into the convenience.
Mark Carden: You mentioned that you are taking share they're both overall and in foodservice still.
Mark Carden: Still cases in convenience <unk> foodservice, we're down I am curious if this would have been positive. If you include the foodservice sales that are embedded within your performance foodservice business.
George L. Holm: Well, momentum in our independent business is a big help. We have new business coming in in our national account area that starts anywhere from the beginning of the fourth quarter, and some of it starts in May. And the same in our core mark business; we have some new business that, you know, we've already signed up for and we know is coming in. So those are the things that give us confidence as we get into the fourth quarter. Okay. Sure. Thanks. Oh, sorry.
Speaker Change: And then yes, yes.
Speaker Change: Yes, it would've been six 3% case increase if you.
Speaker Change: Include the foodservice.
Speaker Change: $6 three.
Speaker Change: Hey, great. Thanks.
Speaker Change: Are you seeing much of a change in consumer behavior as gas prices have moderated a bit.
Speaker Change: I think it's too early to tell with that because its pretty recent.
Speaker Change: <unk> had that moderation and we've had the weather component to deal with there.
Speaker Change: At least if you look at it historically, we're going to see some positive impact from that where we're seeing.
Speaker Change: The softness is one large account.
Patrick Hatcher: I was just going to add, you know, what we're really trying to do is make sure that we give you guys some clarity on the cadence of Q3 to Q4. But the third quarter is impacted by weather, but not by much. Is there any way you can kind of quantify how much just you've seen in January it's done? How much of an impact do you think January had on the quarter as a whole? Well, January had a significant impact. I mean, it was a slow month. We're glad to be doing this quarter having, you know, a week of February under our belt once we got past the bad weather, which is really just California now. Things were right back to normal.
Speaker Change: <unk> is very soft.
Speaker Change: And the Monday, and Friday morning traffic is still not quite.
Speaker Change: Back to normal and I think just because a lot of people aren't working.
Speaker Change: Five day week or going into the office for five days, but other than that we see some good success.
Speaker Change: And then it has a long sales cycle, which I've mentioned several times can.
Speaker Change: Convenience in general.
Speaker Change: But in the foodservice, where there are branded programs. Those are typically typically fairly long contractual arrangements. So it may be three years, maybe five years.
Speaker Change: With our turnkey programs that I mentioned in the prepared remarks.
Speaker Change: Perfectly southern chicken are true <unk> barbecue those type of programs, where theyre not doing something like that.
George L. Holm: And our case growth was back to normal. So, you know, we've got nine weeks to make up for a difficult four weeks, but we want to, you know, communicate that that does have an impact on our third quarter, but March is so critical to Q3, that we don't have full insight into what impact it would have. January is always a low Ibida month for us.
Speaker Change: Getting quick.
Speaker Change: Where they have to change out signage and they're doing that with somebody else, who maybe had a three or five year agreement.
Speaker Change: Sometimes those are going to be six months 12 months before they are actually up and going but what we do is we keep track every month, how many new programs that we've signed up.
Speaker Change: And we just feel real good there even the month of January it was difficult to get those things done we did sign up a significant amount of customers. So RF foodservice business into convenient sweet.
George L. Holm: Great. I appreciate it. I'll pass it on.
Edward J. Kelly: Thank you, do we really have a garden with UBS? Great, thanks so much for taking the question. So once I dig into convenience a bit, you mentioned that you're taking their bows overall and in food service. Still, cases in convenience food service were down. I'm curious if this would have been positive if you included the food service sales that are embedded within your performance food service business. And then, yeah, yeah, it would have been a 6.3% case increase if you included the food service. 6.3.
Speaker Change: We're pleased with where we're at at this stage of the game.
Speaker Change: Okay, Great and then as a follow up just you talked a bit about capital for strategic M&A.
Speaker Change: Mentioned recently that foodservice would likely be the primary focus there.
Speaker Change: Just anything that you've seen recently that would make you any more or less optimistic at the volume of <unk>.
Speaker Change: <unk> deals and then if you did add within foodservice.
Speaker Change: Do you have any order of preference between bolt on category additions are white space or is it simply.
George L. Holm: Okay, great. Are you seeing much of a change in consumer behavior as gas prices have moderated a bit? You know, I think it's too early to tell with that because it's pretty recent that we've had that moderation and, you know, we've had the weather component to deal with there. But I think, at least if you look at it historically, we're going to see some positive impact from that. Where we're seeing the softness is one large, that is very soft. And the Monday and Friday morning traffic is still not quite back to normal.
Speaker Change: Looking at the highest return.
Speaker Change: Yes.
Speaker Change: Looking at White space, that's important to us.
Speaker Change: We've spent.
A lot of time on capacity in the west coast or the whole west actually.
Speaker Change: You look at our company from a broad line standpoint west of the Mississippi, We really only had one and thats in northern California, and that's actually our smallest broad liner in the country. So we.
George L. Holm: I think it's because a lot of people aren't working five days a week or going into the office for all five. But other than that, you know, we see some good success. And then it has a long sales cycle, which I've mentioned several times, convenience in general. But in the food service industry, where there are branded programs, those are typically, typically fairly long contractual arrangements and maybe three years and maybe five years.
Speaker Change: Get our monthly share information, which we think is fairly accurate and it's got all of the large players.
Speaker Change:
Speaker Change: Our shares are very low in the west.
Speaker Change: Very high in the east and continue to get better in the east. So we need that capacity in the west and we're adding capacity as opposed to acquisitions, where we feel like may be acquisitions wont be available and there is other potential ones that we have we don't really look at bolt ons or.
George L. Holm: So with our turnkey programs that I mentioned in the prepared remarks, like perfectly southern chicken or true Q barbecue, those type of programs where they're not doing something like that. We get in quick where they have to change out their signage, and they're doing that with somebody else who maybe had a three or five-year agreement. Sometimes those are gonna be six months, 12 months before they're actually up and gone.
Speaker Change: Bold in it's just not something that that makes a lot of sense for us right now.
Speaker Change: Yeah.
Speaker Change: Got it that makes sense alright, thanks, so much and good luck guys.
Speaker Change: Thanks.
Speaker Change: And we do have a next question from Edward Kelly with Wells Fargo.
Yes.
Edward J. Kelly: Hi, good morning, guys.
Maybe could we start on the on the independent.
Edward J. Kelly: Side I mean, obviously you saw a nice acceleration.
An independent case growth strategy is clearly working there. It does seem like there is the competitive backdrop as maybe intensifying a bit just from the standpoint of the amount of focus there is on <unk>.
George L. Holm: But what we do is we keep track every month of how many new programs that we've signed up, and we just feel real good there. Even the month of January, when it was difficult to get those things done, we did sign up a significant number of customers. So our food service business ended conveniently. We're really pleased with where we're at at this stage of the game. Okay, great.
Edward J. Kelly: Driving independent case growth can you just talk about what Youre seeing competitively and then looking forward how do we think about that.
George L. Holm: And then, as a follow-up, you talked a bit about the potential for strategic M&A. You mentioned recently that food service would likely be the primary focus there. Just anything that you've seen recently that would make you any more or less optimistic about the volume of potential deals. And then, if you did add within food service, do you have any order of preference just between bolt-ons, category additions, or white space, or is it simply, you know, what's going to have the highest return? Yeah, well, you know, we're always looking for white space.
Edward J. Kelly: Pace of growth for this business for you over time and I think it was in 2019, you talked about 6% to 10% growth that was kind of a target for a long time is that a reasonable target as we think about that.
Coming couple of years.
Speaker Change: Thoughts there would be great. Thank you.
Speaker Change: Yes, I will start with the competitive.
Speaker Change: Nature of the business I think it's always been very competitive and independent.
Speaker Change: I've never seen a time, where it wasn't.
Speaker Change: As far as being more competitive than normal.
Speaker Change: I don't really hear that from our people.
Speaker Change: So I would just say that it's a very competitive business and it's as competitive as ever right now, but not necessarily more so as far as pace of growth I think the 6% to 10% is something that we don't want to hang our hat on.
George L. Holm: That's important to us. We've spent a lot of time on capacity on the West Coast, or the whole West, actually. If you look at our company from a broad line standpoint, west of the Mississippi, we really only have one, and that's in Northern California. And that's actually our smallest broad liner in the country.
Speaker Change: We're doing that right now with.
Speaker Change: In excess of 7% new customers.
George L. Holm: So when we get our monthly share information, which we think is fairly accurate, and it includes all the large players, you know, our shares are very low in the West and very high in the east and continue to get better in the east. So we need that capacity in the west, and we're adding capacity as opposed to acquisitions where we feel like maybe acquisitions won't be available, and there are other potential ones that we have. We don't really look at bolt-ons or Olden's.
Speaker Change: We're doing it with about an 8% increase in salespeople and we're starting to lap last year.
Speaker Change: That busy post COVID-19, adding salespeople, so that number's probably.
Speaker Change: Going to come down as far as year over year, but as these people have.
Speaker Change: Gained more experience they are doing better and we look to.
Speaker Change: Having a higher case growth.
Speaker Change: Then we have growth in salespeople.
Speaker Change: But six to 10 is still something that.
Speaker Change: It is ingrained in our people.
Speaker Change: And we're not at a point, where we want it back off from that.
George L. Holm: It's just not something that makes a lot of sense for us right now, but it makes sense. All right. Thanks so much and good luck, guys. Thank you. Thank you. Do we have? I'm Edward Kelly with Wells Fargo.
Speaker Change: And just as a follow up you mentioned this in the convenience business this notion of.
Speaker Change: Elasticity and.
Speaker Change: The demand destruction caused by the inflation.
Edward J. Kelly: Hi, good morning, guys. George, maybe could we start on the independent side? I mean, obviously, you saw a nice acceleration.
Speaker Change: And I have to imagine that.
Speaker Change: Seen that probably across business spent a lot of pricing and all of these businesses.
Speaker Change: Pricings easing generally do you think that the industry has an upcoming benefit coming from lets call. It like normalization of underlying demand as inflationary pressures normalize you've been putting up.
Edward J. Kelly: In independent case growth strategies clearly working there, it does seem like, you know, there's a competitive backdrop maybe, you know, intensifying a bit just from the standpoint of, you know, the amount of focus there is on driving independent case growth. Can you just talk about what you're seeing competitively?
Speaker Change: Solid growth, obviously in a backdrop, where I don't think the industry is growing very much.
Speaker Change: Well, we see that in the share reports that we get and Thats what gives us confidence going forward is we're doing a better and better job.
George L. Holm: And then, you know, looking forward, how do we think about the right pace of growth for this business for you over time? You know, I think it was in 2019, you talked about six to 10% growth. That was kind of a target for a long time. Is that a reasonable target as we think about the coming, you know, couple of years? Just thoughts there would be great.
Speaker Change: Gaining share and units.
Speaker Change: Okay.
Speaker Change: A 10th or two tenths more than say.
Speaker Change: The previous increase and share that we had the previous year, but thats a lot in this industry the size that we are.
And with shares I guess to a degree as loans are as far.
Speaker Change: As far as pricing goes I think a lot of people overshot.
Speaker Change: With the pricing and to <unk>.
George L. Holm: Yeah, we'll start with the competitive nature of the business. I think it's always been very competitive and independent. I've never seen a time where it wasn't.
Speaker Change: Some degree I don't blame them.
Speaker Change: <unk>.
Speaker Change: A lot of issues with food inflation and not just food but.
Speaker Change: Rents going up utilities going up I mean, everything was going up.
George L. Holm: As far as being more competitive than normal, I don't really hear that from our people. So I would just say that it's a very competitive business, and it's as competitive as ever right now, but not necessarily more so. As far as the pace of growth is concerned, I think that the six to ten percent is something that we don't want to hang our hat on. We're doing that right now, you know, with in excess of 7% new customers. And we're doing it with about an 8% increase in salespeople. And we're starting to lap last year when we got busy post-COVID adding salespeople, so that number is probably going to come down as far as year over year.
Speaker Change: What we're seeing now is a lot of people are not backing off on their menu prices, but there's just a lot of promotional activity. That's going on another sign that I think things are going to start to come down.
Speaker Change: <unk> and our fifth star and our core Mark business are typically.
Speaker Change: A time where people increased prices.
Speaker Change: And they certainly did a year ago January and what we saw this January was a lot of people did not take their normal price increase and we saw a step down in inflation from December to January more about prices gone up last year and not gone up this year than anything coming down.
George L. Holm: But as these people have gained more experience, they're doing better. And we look to... have higher case growth, then we have growth and salespeak. But six to 10 is still something that, you know, it's ingrained in our people.
Speaker Change: So I don't know I mean.
Speaker Change: Ah.
Don't see people that.
Speaker Change: I, just don't see people, reducing their menu prices I think that it'll be more like kind of hanging on where they're at now.
George L. Holm: And, you know, we're not at a point where we want to back off from that. And just as a follow-up, you mentioned this in the convenience business, this notion of, you know, elasticity and the demand destruction that's caused by inflation. And I have to imagine that, you know, we've seen that probably across business, a lot of pricing and all of these businesses, prices, you know, easing generally. Do you think that the industry has an upcoming benefit coming from, let's call it like, normalization of underlying demand as inflationary pressures? Normalize, you've been putting up, you know, very solid growth, obviously, in a backdrop where I don't think the industry is growing very well. We see that in the share reports that we get.
Speaker Change: And.
Speaker Change: And promoting heavier.
Speaker Change: And then just quickly for you George you mentioned an improvement.
George L. Holm: Off of a soft January on whether any additional color there.
George L. Holm: It was a normal week for us as far as percentage increase over the previous year.
George L. Holm: In January certainly was not and there is another factor with it too.
George L. Holm: Yes.
George L. Holm: The calendar really helped us at the end of Q2.
George L. Holm: Particularly the last week and it hurt us the first week of Q3, so thats another factor with it now it's a very low volume week anyway.
George L. Holm: So when you spread that over 13 weeks and certainly over 52 weeks.
George L. Holm: Real material.
George L. Holm: And that's what gives us confidence going forward because we're doing a better and better job of gaining share. I mean, it's, you know, a tenth or two tenths more than say, the previous increase in share that we had the previous year, but that's a lot, and it is true the size that we are. And with shares, I guess, to a degree, as low as ours are.
George L. Holm: But I don't see any change in the in the industry I really don't its hard when you look at numbers like that but when you look underneath things at it.
George L. Holm: It looks fine to me I think the demand is still out there.
Speaker Change: Great. Thank you.
Speaker Change: And we do have our next question from Kelly Bania with BMO capital.
Kelly Ann Bania: Good morning, just wanted to follow up a little bit on convenience George I think you talked about 6% growth.
George L. Holm: As far as pricing goes, I think a lot of people overshot with the pricing and, to some degree, I don't blame them that we're facing a lot of issues with food inflation and not just food, but you know rents going up, and utilities going up. I mean, everything was going up. What we're seeing now is a lot of people are not backing off on their menu prices, but there's just a lot of promotional activity that's going on. Another sign that I think things are going to start to calm down. January in our Vistar and our Cormark business is typically a time when people increase prices. And they certainly did a year ago, in January.
Kelly Ann Bania: There. If you include the cases that go through foodservice I'm, assuming that hopefully just food.
Kelly Ann Bania: <unk> service.
Kelly Ann Bania: Type product.
Speaker Change: It is.
Speaker Change: Okay.
Speaker Change: Can you talk a little bit about the appetite for <unk>.
Speaker Change: <unk> and the pet independent convenience stores.
Speaker Change: Kind of make that conversion and you talked about the turnkey programs, but.
Speaker Change: Just in this cycle, where maybe there is maybe a little bit of softness.
Speaker Change: Does that appetite to make that transition and then can you also elaborate on the new business wins.
Speaker Change: Sorry, just touched on.
Yes, I think the appetite is high I mean, certainly the tobacco side of their business.
George L. Holm: And what we saw this January was a lot of people did not take their normal price increase. And we saw a step down in inflation from December to January, more about prices going up last year not going up this year than anything coming down. So I don't know.
Speaker Change: It's going to continue to slide and they have to have something to replace those gross profit dollars that that creates.
Speaker Change: And I think foodservice is the best way for them to do that.
Speaker Change: And.
Speaker Change: I am really enjoying watching how many of these programs we're getting into places that didn't do foodservice before where they are finding space in that store that isn't giving them. The return that you used to give them.
George L. Holm: I mean, I just don't see people that will, I just don't see people reducing their menu prices. I think that it'll be more like kind of hanging on where they're at now and promoting heavier foods. And just quickly for you, George, you mentioned an improvement from a soft John Year on whether there was any additional color there. It was a normal week for us as far as the percentage increase over the previous year, and January certainly was not. And there's another factor with it too. The calendar really helped us at the end of Q2, particularly the last week. And it hurt us in the first week of Q3.
Speaker Change: And.
Speaker Change: Putting foodservice product to take his place now typically theres equipment involved there with signage involved there.
Speaker Change: So it does take a good bit of time as far as new business goes.
We have several things that we'll have starting.
Speaker Change: In the next six months oftentimes, it's a situation where.
Speaker Change: You have to wait for that contract and in some instances the current suppliers been notified and some they havent. So that's not our job to do that.
George L. Holm: So that's another factor with it. Now, it's a very low volume week anyway. So, you know, when you spread that over 13 weeks and certainly over 52 weeks, it's, you know, it's not real material. Um, but I don't see any change in the industry. I really don't. It's hard when you look at numbers like that. But when you look underneath things, it looks fine to me.
Speaker Change: So.
Speaker Change: Don't talk specifically about any piece of business, but we have great confidence in our future growth within our convenience area.
Speaker Change: Okay. That's helpful. Maybe I'll just tack on another one on the star here.
Speaker Change: I think you said the inflation was just under seven.
Speaker Change: So it looks like maybe cases were just slightly positive.
George L. Holm: I think the demand is still out there. Thank you. Kelly is the GM.
Speaker Change: Can you just elaborate on the on the channels that maybe are growing.
Kelly Ann Bania: OK. Thank you. Good morning.
George L. Holm: I just wanted to follow up a little bit on convenience. George, I think you've talked about 6% growth. There, if you include the cases that go through food service, I'm assuming that's mostly just food for food service type products. It is in progress, entirely food.
Speaker Change: Not and just maybe as you think about case growth or the start into the back half.
Speaker Change: Yes, Kelly this is Patrick I'll take that one so on the <unk>.
Patrick Hatcher: <unk>, where we saw some really nice growth in Q2 or in vending.
Patrick Hatcher: Office coffee office supply.
Patrick Hatcher: Theater was a relatively soft quarter for them just not a lot of content out there but.
George L. Holm: Okay. But can you just talk a little bit about the appetite for chain and independent, independent convenience stores to kind of make that conversion? And you talked about the turnkey programs, but just in this cycle where maybe there is maybe a little bit of softness, what is the appetite to make that transition? And then can you also elaborate on the new business wins you sort of touched on? Yeah, I think my appetite is high.
Patrick Hatcher: But as we go forward and look.
Patrick Hatcher: Looking at the back half of the year.
Patrick Hatcher: Again, they had a really strong quarter given the fact that they were comping. Some inventory gains in Q2, we don't expect that going forward.
Patrick Hatcher: The channels that we see growing.
Patrick Hatcher: They always have a relatively.
Patrick Hatcher: <unk> January as well and then things start accelerating for them. So we do expect most of their channels to show some nice positive growth for the balance of the year, including theater as we get into March and later into the year with some new releases coming out and then <unk>.
George L. Holm: I mean, certainly, the tobacco side of their business is going to continue to slide, and they have to have something to replace those gross profit dollars that that creates. And I think food service is the best way for them to do that. And I'm really enjoying watching how many of these programs are getting into places that didn't do food service before, where they're finding space in that store that isn't giving them the return that it used to give them, and putting food service products in it to take its place. Now, typically, there's equipment involved there, there's signage involved there. So it does take a good bit of time.
Patrick Hatcher: Vending and office coffee.
Patrick Hatcher: Not so much office coffee, that's kind of a tail end of the season farm defending should pick up quite a bit too.
Patrick Hatcher: And then I would also add Kelly that our ecommerce business is doing very well.
Speaker Change: Thank you.
Speaker Change: And our next question comes from Alex Slagle with Jefferies.
Alexander Russell Slagle: Hey, good morning, Hey, guys. Thanks.
I just wanted to touch on the chain business national chain business.
George L. Holm: As far as the new business goes, we have several things that we'll be starting in the next six months. Often, it's a situation where you have to wait for that contract to end.
Alexander Russell Slagle: You talked about some of the optimism that you would see the case growth start to pick up.
Alexander Russell Slagle: And it does seem like you're seeing some green shoots there emerging.
George L. Holm: In some instances, the current supplier has been notified, and in some instances, they haven't. So that's not our job to do that. So, you know, we don't talk specifically about any piece of business, but we have great confidence in our future growth within our convenience area. Okay, that's helpful. Maybe I'll just tack on another one on Vistar here.
Alexander Russell Slagle: Is this mostly a function of your your customer mix or is there signs in broader strength in the full service casual dining category, where there may be flexing their benefits of the marketing voice and value out there in this environment.
Kelly Ann Bania: I think you said the inflation was just under seven, so it looks like maybe cases were just slightly positive. Can you just elaborate on the channels that maybe are growing or not? And maybe as you think about case growth for Vistar in the back half? Yeah, Kelly, this is Patrick.
Alexander Russell Slagle: Well, we do have accounts and our national account mix.
Alexander Russell Slagle: Have not done well for quite a while.
Alexander Russell Slagle: <unk> seen a little bit of the bounce off the bottom I would say.
Alexander Russell Slagle: We have some that are on a great growth path, so that mix coming together.
Patrick Hatcher: I'll take that one. So on Vistar, you know, the channels where we saw some really nice growth in Q2 were in vending, office coffee, office supply. Yeah, theater was a relatively soft quarter for them. Just not a lot of content out there.
Alexander Russell Slagle: In aggregate they did grow which was really nice to see we had a little bit of new business come in.
We have more that starts actually next month and we had more of that starts in may So we will be putting out.
Patrick Hatcher: But as we go forward, and, you know, looking at the back half of the year, you know, again, they had a really strong quarter, given the fact that they were comping some inventory gains in Q2. We don't expect that going forward, but the channels that we see growing, you know, they always have a relatively quiet January as well, and then things start accelerating for them. So we do expect most of their channels to show some nice positive growth for the balance of the year, including theater as we get into March and later into the year with some new releases coming out. And then vending and office coffee should, well, not so much office coffee, that's kind of the tail end of the season for them, but vending should pick up quite a bit too. And then I would also add, Kelly, that our e-commerce business is doing very well. Thank you. Hey, good morning, you guys.
Alexander Russell Slagle: Pretty good national.
Alexander Russell Slagle: Account case growth and it's all in the restaurant area.
Speaker Change: Got it and as a follow up just more broadly the positive mix shift that you've seen across products and customer types. I mean, it's been a nice tailwind for a while and there have been internal and external drivers behind that.
Speaker Change: <unk> talked about some of this with the independence, but just kind of curious where you have the most confidence in seeing these positive shifts continuing and if there are certain corners of your business that might emerge is bigger or smaller drivers in the future.
Speaker Change: Yes, I see our independent foodservice business, continuing to grow well and great confidence around our foodservice business into convenience.
George L. Holm: Thanks. I just wanted to touch on the chain business, the national chain business. And, you know, you talked about some of the optimism that you'd see case growth start to pick up, and it does seem like you're seeing some green shoots there, merging. Is this mostly a function of your customer mix? Or are there signs of broader strength in the full service casual dining category where they may be flexing their benefits of, you know, the marketing voice and value out there in this environment? Well, you know, we do have accounts in our national account mix that have not done well for quite a while. We've seen a little bit of bouncing off the bottom, I would say.
Speaker Change: E Commerce definitely a strong point.
Speaker Change: For us and as far as the mix goes I mean, that's really been our story for 20 years.
Speaker Change: We've just always grown better.
Speaker Change: In the areas that produce a higher margin.
Speaker Change: And.
Speaker Change: Excluding when we made some big acquisitions that maybe have a different mix of business.
Speaker Change: And we have and I think that's going to continue to be the story for us.
Speaker Change: Certainly like the National account business. Similarly, we have some great customers in some really good relationships.
Speaker Change: That's not going to be what drives our.
Speaker Change: Our gross margins, but some of the business is very efficient and very profitable.
George L. Holm: We have some that are, you know, on a great growth path. So that mix coming together, in aggregate, they did grow, which was really nice to see. We had a little bit of new business come in. We have more that start actually next month, and we have more that start in May. So we'll be putting out pretty good, you know, national account case growth, and it's all in the restaurant area. Got it.
Speaker Change: And Alex I'll, just add because George brought up on the call those turnkey programs going into convenience like perfectly southern.
It's huge potential for us they do.
Speaker Change: We've got some strong brands that we've developed.
Speaker Change: And it took a while I mean, it is a different business, we had to do some tweaking to product the product has to hold up longer.
Speaker Change: Then what you would typically sell to a restaurant, it's not what I would call absolute immediate consumption.
George L. Holm: And as a follow-up, just more broadly, the positive mix shift that you've seen across products and customer types, I mean, it's been a nice tailwind for a while, and there have been internal and external drivers behind that. And we talked about some of this with the independent, but I was just kind of curious where you have the most confidence in seeing these positive shifts continuing, and if there are certain corners of your business that might emerge as bigger or smaller drivers in the future. Yeah, well, I see our independent food service business, you know, continuing to grow well, with great confidence around our food service business into convenience and eCommerce, definitely a strong point for us. And as far as the mix goes, I mean, that's really been our story for 20 years.
Speaker Change:
We had a lot of work to do and we're pretty much through that.
Speaker Change: <unk>.
Speaker Change: We just look at this as a good growth engine for us.
Yeah.
Speaker Change: That's great. Thank you.
Speaker Change: And our next question comes from Brian <unk> with Morgan Stanley.
Brian: Thank you good morning.
Brian: Maybe a quick one first is is the weather impact in January with the more significant in any one of your three segments like I don't know if C stores feels that more or anything.
Brian: It was it was the most significant probably in foodservice convenience with very close to that.
Brian: This started not so much.
Speaker Change: Okay understood.
Speaker Change: In the foodservice segment I think.
And the most recent quarter.
Speaker Change: Sure.
Speaker Change: Both in gross profit and growth in operating expenses was sort of similar.
Speaker Change: Do you think that you can see kind of more operating leverage in that segment going forward is that is that kind of just a function of where you are with kind of the hiring cycle or what else will kind of drive the growth rates of those two lines.
George L. Holm: You know, we've just always grown better in the areas that produce higher margins, and you know, excluding when we've made some big acquisitions that maybe have a different mix of business than we do. And I think that's going to continue to be the story for us. We certainly like the national account business, and we have some great customers and some really good relationships.
Speaker Change: Well, we see that our productivity has got much better.
Speaker Change: And we've had a good comeback there, but there's still more to be done actually core mark was probably affected the most.
George L. Holm: But, you know, that's not going to be what drives our gross margins, but some of the business is very efficient and very profitable. And I'll just add, because George brought it up on the call, those turnkey programs going into convenience, like Perfectly Southern, they have huge potential for us.
Speaker Change: Going through Covid was the one that came back the fastest from an operational standpoint, they did a terrific job so thats part of it.
Speaker Change: The hiring of salespeople we've carried.
Speaker Change: A big pay.
Speaker Change: Payroll people that were not.
Speaker Change: <unk> Commission for a period of time, we'll cycle through that.
George L. Holm: And, You know, we've got some strong brands that we've developed. And it took a while. I mean, it is a different business. We had to do some tweaking to the product. The product has to hold up longer than what you would typically sell to a restaurant. It's not what I would call absolute immediate consumption.
Speaker Change: Good investments glad we did it and then the capacity that we've added.
Speaker Change: When you open new facilities, there is a definite learning curve and.
Speaker Change: It's going to have it's going to come along with higher expenses for a period of time also good investments.
Speaker Change: And then from an it standpoint, we've invested heavily there.
George L. Holm: We had a lot of work to do, and we're pretty much through that, and, you know, we just look at this as a good growth engine. That's great. Thank you. And our next question comes from Brian Harbor. Thank you. Good morning.
Speaker Change: We're on the path to get to one ERP very slow path.
Speaker Change: Because that always comes with disruption.
Speaker Change: And we're pretty careful with that and then those would be the areas. So I would say where our expenses higher.
Brian Harbor: Just maybe a quick one first: is the weather impact in January more significant in any one of your three segments? Like, I don't know if CSTORS feels that more or anything. It was probably the most significant in food service, but convenience was very close to that. This star knocks them up.
Speaker Change: Certainly insurance, which I should probably have Pat address that.
Speaker Change:
Pat: Yeah, and I'll just jump in on that so I mean, as we've talked we definitely have seen some higher opex, but I do on <unk>.
Speaker Change: Went out that.
George L. Holm: Okay, understood. In the food service segment, I think in the most recent quarter, your growth in gross profit and growth in operating expenses were sort of similar. Do you think that, you know, you can see kind of more operating leverage in that segment going forward? Is that, is that kind of just a function of where you are in the hiring cycle or, you know, what else will kind of drive the growth rates of those two lines? Well, we see that our productivity has got much better, and we've had a good comeback there. But there's still more to be done. Actually, Cormark, who was probably affected the most, you know, going through COVID, was the one that came back the fastest from an operational standpoint. They did a terrific job. So that's part of The hiring of salespeople, you know; we've carried a big payroll of people that were not on commission for a period of time. We'll cycle through that. It was a good investment. We're glad we did it.
Pat: We were able to grow gross profit faster than so drops.
Pat: Some nice margin expansion at the EBIT line when it comes to insurance specifically.
Speaker Change: Not to go into too much details, but we are a high deductible insurer and.
Speaker Change: So we have third party insurers that cover everything above the deductible with some limitations, but for that deductible. According to GAAP, we established an accrual and there's just been some market dynamics. So this quarter in particular that expense was a little higher than what we expected and that has a lot to do it.
Speaker Change: Myles, we're driving has a lot to do with the industry and the incidents there they're seeing in the severity of those incidents, but we don't expect going forward that we would have that additional expense like we saw this quarter. It was really a bit of a catch up and we expect to.
Speaker Change: Manage it going forward, but there are some things that we can't manage like we don't match. The overall industry, obviously, yes, I would make the statement too when you look at the quarter that we just reported.
George L. Holm: And then the capacity that we've added. You know, when you open new facilities, there is a definite learning curve. And it's going to have, it's going to come along with higher expenses for a period of time. But also, a good investment.
Speaker Change: When you look at the insurance <unk>.
Speaker Change: Winds that we had.
Speaker Change: The inventory holding gains that we had the previous year.
Speaker Change: It was it was quite a quarter for US we were really up against a lot, particularly.
Speaker Change: From an inventory standpoint within this star.
Speaker Change: Couldn't be more pleased.
George L. Holm: And then from an IT standpoint, we've invested heavily there. You know, we're on the path to get to 1 ERP, a very slow path because that always comes with disruption, and we're pretty careful with that. And then those would be the areas I would say where our expenses are higher. Certainly insurance, which I should probably have Pat address.
Speaker Change: Thank you.
Speaker Change: And we have our next question from Joshua long with Stephens.
Joshua C. Long: Great. Thank you for taking my question.
Joshua C. Long: Encouraged to hear about the growth on the new account side. It also sounded like you had noted maybe a re engagement of your kind of existing consumers, maybe some opportunity to drive wallet share penetration could you talk a little bit more about that.
Joshua C. Long: Well.
Patrick Hatcher: Yeah, and I'll just jump in on that. So I mean, as we've talked, we definitely have seen some higher off X, but I do want to point out that, you know, we were able to grow gross profit faster and so dropped, you know, nicely, some nice margin expansion at the EBIT line. When it comes to insurance specifically, not to go into too much detail, but we are a high-deductible insurer, and so we have third-party insurers that cover everything above the deductible with some limitations, but for that deductible, according to GAAP, we establish an accrual, and there's just been some market dynamics. So, this quarter in particular, that expense was a little higher than we expected, and that has a lot to do with how many miles we're driving.
Joshua C. Long: It's interesting when you look at the detail in the account level.
Joshua C. Long: There are certainly more restaurants, I don't what the actual numbers I don't think anybody does but.
Speaker Change: These spaces are all selling up and it's very rare.
Speaker Change: Is that a restaurant that goes dark that's something else ends up coming in but that location other than our restaurants very rare.
Speaker Change: And what we see is that our penetration within the account appears not to be what they would normally be for us. We typically have the ability to add skus to existing business.
Speaker Change: And that wasn't showing up but then when we get to the end of the month and we run reports around the amount of skus that they're buying and are they.
Speaker Change: Buying skus that they were buying a year ago. What we're finding is we're adding skus with that customer that was buying 14 cases, French fries, but weak last year may be buying 11, now I think its because theres more competition out there.
Patrick Hatcher: It has a lot to do with the industry and the incidents they're seeing and the severity of those incidents. But we don't expect going forward that we will have that additional expense like we saw this quarter. It was really a bit of a catch-up, and we expect to manage it going forward. But there are some things that we can't manage.
Speaker Change: And there's just more units open so that'll settle back in.
Speaker Change: One of the things I think that is helping our sales at the account level is a lot of customers reduce their days.
Patrick Hatcher: Like, we don't manage the overall industry. Yeah, and I would make that statement too, when you look at the quarter that we just reported. When you look at the insurance headwinds that we had, and the inventory holding gains that we had the previous year, It was quite a quarter for us. We were really up against a lot, particularly from an inventory standpoint within Vistar. So, I couldn't be more pleased. Thank you, we have. Joshua Long
Speaker Change: And reduce their hours and that was more of course around labor.
Speaker Change: Availability than anything we're seeing that start to go the other way as well.
Speaker Change: Sure.
Speaker Change: They're adding hours in there.
Speaker Change: Going back to six days are going back to seven days a week in which they are opened just another one of those many things that that changed during this pandemic and are gradually going back to normal state.
Joshua C. Long: Great. Thank you for taking my question. I was encouraged to hear about the growth on the new account side. It also sounded like you had noted maybe a re-engagement of your kind of existing consumers, maybe some opportunity to drive wallet share penetration. Could you talk a little bit more about that?
Speaker Change: So.
Speaker Change: The fact that we're still adding skus to the account.
Or the accounts in general tells me that.
Speaker Change: As the industry totally normalizes.
George L. Holm: You know, it's interesting when you look at the detail at the account level. There are certainly more restaurants. I don't have, you know, what the actual number is. I don't think anybody does.
Speaker Change: The spaces are awful.
Speaker Change: Then I think that's going to show up in and better at.
Speaker Change: Actual dollar case penetration within those accounts, so that's where I see some upside for us.
George L. Holm: But, you know, these spaces are all filling up, and it's very rare that a restaurant that goes dark will see something else end up coming in to that location other than a restaurant. Very rare. And what we see is that our penetration within the account appears not to be what it would normally be for us. We typically have the ability to add SKUs to existing business, and that wasn't showing up.
Speaker Change: Great. Thank you for that and then recently you announced a pretty interesting product partnership on the premium dessert side I'm. Just curious if that's something that with maybe a one off opportunity or something you could see or we should expect.
Speaker Change: There are opportunities down the line in terms of just being able to kind of add options elevate product quality, but then also.
George L. Holm: But then when we get to the end of the month and we run reports around the amount of SKUs that they're buying, and are they not buying SKUs that they were buying a year ago? What we're finding is we're adding SKUs, but that customer who was, you know, buying 14 cases of French fries a week last year may be buying 11 now. I think it's because there's more competition out there, and there are just more units open. So I'll settle back in.
Speaker Change: I'll speak to the convenience and just overall value proposition that.
Speaker Change: Do you bring to your customers.
Speaker Change: I think if there's an area that we'll do more of that it will probably be in the convenience area.
Speaker Change: But the arrangement that we did.
Speaker Change: Just a high quality manufacturer, we're making sure that for our staff.
George L. Holm: One of the things I think that is helping our sales at the account level is that a lot of customers reduce their days and reduce their hours. And that was more, of course, around labor availability than anything. We're seeing that start to go the other way as well, where they're adding hours and they're, you know, going back to six days or going back to seven days a week in which they're open. Just another one of those many things that changed during this pandemic and are gradually going back to normal.
Speaker Change: <unk> product that they are using their products. So that we can then market their brand alongside of ours. It.
It would be great. If we could do that in more areas. So I think this is probably not a one off but it's certainly not a new strategy.
Speaker Change: Got it that's helpful. And then last one for me when we think about kind of segments, where you've had an opportunity to drive continued growth and you already have a leadership position micro markets is something that we've talked about on prior calls curious if you could just provide an update there in terms of.
George L. Holm: So the fact that we're still adding SKUs to the account, or the accounts in general, tells me that as the industry totally normalizes, these spaces are awful, then I think that's going to show up in better actual dollar or case penetration within those accounts. So that's, that's where I see some ups. Great, thank you for that.
Speaker Change: Maybe kind of in consumer and customer moving towards in building out that micro market business as we think about kind of a normalization in the return to office and work environment.
Speaker Change: Yes, Josh Patrik micro market does continue to grow.
Joshua C. Long: And then recently you announced a pretty interesting product partnership on the premium dessert side. I'm just curious if that was maybe a one-off opportunity or something you could see where we should expect other opportunities down the line in terms of just being able to kind of add options, elevate product quality, but then also, you know, kind of speak to the convenience and just overall value proposition that you bring to your customers. I think if there's an area that will do more of that, it'll probably be in the convenience area. But the arrangement that we did, it's just a high quality manufacturer. We're making sure that for our specified product, they're using their products so that we can then market their brand alongside ours. It would be great if we could do that in more areas. I think this is probably not a one-off, but it's certainly not a new strategy.
Speaker Change: The technology gets better and better and less expensive so the checkout.
Speaker Change: And the opportunity to provide just a much broader selection you can bring in refrigerated frozen Hot and then all the different types of candy snacks and beverages and all different sizes.
Speaker Change: A lot of attractive things to it so.
Speaker Change: The operators that <unk> works with go sell that into office spaces. They just have the opportunity to really expand upon what they've had in the past.
Speaker Change: And we see just continuing to grow and they continue to either create new spaces for micro markets, where they replace old lending banks and put into micro market, but either way. It's a net positive because of all the additional skus and categories that can add to that market yes.
Speaker Change: We've also had places where they had an employee cafeteria in the past.
George L. Holm: That's helpful. And then last one for me, when we think about kind of segments where you have an opportunity to drive continued growth, and you already have a leadership position, micro markets are something that we've talked about on prior calls. Curious if you could just provide an update there in terms of maybe the kind of in consumer and customer moving towards and building out that micro market business as we think about kind of normalization and the return to the office and work environment. Yeah, Josh and Patrick, micro markets just continue to grow. Uh, you know, the technology gets better and better and less expensive. So, for the checkout. And the opportunity to provide a much broader selection; you can bring in refrigerated, frozen, hot, and then all the different types of candy, snacks, and beverages, and all different sizes. So there's just a lot of attractive things about it.
Speaker Change: Shut that down during the Covid time, then open back up as a micro market as opposed to.
Speaker Change: Trade line type situation and that's great for us because we really don't play in most of the non commercial.
Speaker Change: Areas of our business.
Speaker Change: From a from our foodservice team.
Speaker Change: Thank you.
Speaker Change: And we have our next question from Jeffrey Bernstein with Barclays.
Speaker Change: Okay.
Jeffrey A. Bernstein: Great. Thank you very much.
Jeffrey A. Bernstein: Two questions first one just.
Jeffrey A. Bernstein: You mentioned strong and accelerating sales growth to close fiscal <unk> I know you mentioned into the holidays.
Jeffrey A. Bernstein: We see early fiscal <unk> hit by weather, but.
Jeffrey A. Bernstein: Besides whether youre seeing any change in the macro and I mean.
Jeffrey A. Bernstein: Foodservice accounts, so that within the foodservice segment or do you think it's purely whether I know some people have talked about maybe a slower macro in recent weeks or months I'm just trying to get your sense, how you decipher between weather and perhaps a slower macro and then I had one follow up.
Speaker Change: Yes, well, we only have the one week coming out of the weather.
Jeffrey A. Bernstein: And that was very normal.
Jeffrey A. Bernstein: So I mean thats a good sign but to put it is it is only one week and certainly in Q2 at the end of Q2, we were helped by.
Patrick Hatcher: So, as the operators that this works with, go sell that into office spaces. They just have the opportunity to really expand upon what they've had in the past. And we see it continuing to grow, and they continue to either create new spaces for micro markets, or they replace old vending banks with micro markets. But either way, it's a net positive because of all the additional skews and categories they can add to that market. Yeah, we've also had places where they had an employee cafeteria in the past, shut that down during the COVID time, and then open back up as a micro market as opposed to, you know, a tray line type situation. And, you know, that's great for us because we really don't play in most of the non-commercial areas of our business, you know, from the food. Thank you. We have ours. Great, thank you very much.
Jeffrey A. Bernstein: Having a five day ship week versus a four of the previous year.
Jeffrey A. Bernstein:
Jeffrey A. Bernstein: So that helped at the end of the quarter I don't really see a difference.
Jeffrey A. Bernstein: Yeah.
Speaker Change: No that I can say that three weeks from now but right now.
Speaker Change: We look at what happened in January that's a blip that was weather related.
Okay.
Speaker Change: Great Thats encouraging.
Speaker Change: And then George I think you just mentioned in terms of restaurant boxes I feel like from Covid a lot of people came to a consensus that maybe they were 10% fewer restaurants, 10% close to COVID-19.
Speaker Change: For a while it sounded like those boxes were not necessarily filling that month after months, maybe somebody would come into one but there was another that was emptying out. So in the end you werent seeing a net recovery in terms of the number of units, but I think you mentioned that it sounds like maybe you are now seeing those empty boxes filling up so I'm. Just wondering I know you said, it's hard to find good data so for sure it's much harder for us.
John Heinbockel: Two questions. First one, just the dimension of strong and accelerating sales growth to close fiscal 2Q. And I know you mentioned the holidays and early fiscal 3Q hit by weather, but besides weather, are you seeing any change in the macro in any of your food service accounts or within the food service segment? Or do you think it's purely weather?
Speaker Change: And for you but.
Speaker Change: Where are we in terms of the recovery back to the prior peak restaurant count just trying to get your sense for.
George L. Holm: I know some people have talked about maybe a slower macro in recent weeks or months. I'm just trying to get your sense of how you decipher between weather and perhaps a slow and macro. I'm going to add one follow-up. Yeah, well, we only have the one week coming out of the web, and that was very normal.
Speaker Change: Those boxes filling back up again, which are pretty good for everybody.
Speaker Change: Yes, that's hard to tell.
Speaker Change: I can say in my travels I don't see many empty restaurants any longer.
Speaker Change: Probably wouldn't have said that even six months ago.
George L. Holm: So, I mean, that's a good sign, but it is only one week. And certainly in Q2, at the end of Q2, we were helped by having a five-day ship week versus four the previous year. So, you know, that helped at the end of the quarter. But I don't really see a difference.
Speaker Change: I think they are filling up.
Speaker Change: Look at our number of accounts and we're so far ahead of 2019 as far as number of accounts, particularly independent <unk>.
Speaker Change: Restaurant accounts.
Speaker Change: Sure.
Speaker Change: I think that for the health of the industry.
Speaker Change: I hope, we don't get overbuilt again, but I think we're in a pretty good spot.
Speaker Change: I'm actually just lastly.
George L. Holm: I don't know that I can say that three weeks from now, but right now, we look at what happened in January as a blitz that was weather-related. Great, that's encouraging. And then George, I think you just mentioned in terms of restaurant boxes. I feel like through COVID, a lot of people came to a consensus that maybe there were 10% fewer restaurants or 10% closed through COVID. And for a while, it sounded like those boxes were not necessarily filling. That month after month, maybe somebody would come into one, but there was another that was emptying out.
Speaker Change: The independent segment I know you mentioned, it's always competitive and you continue to invest in the sales force I think you mentioned, it's up 8% year on year.
Speaker Change: It sounds like some of your peers are perhaps more aggressively doing something similar so I'm wondering whether you're finding any incremental challenge finding good labor increased turnover or anything that's making it harder for you to pursue what you've always done because other players are now getting more aggressive going after similar independent salespeople, perhaps thank you.
Speaker Change: Yes, I would.
John Heinbockel: So, in the end, you weren't seeing a net recovery in terms of the number of units. But I think you mentioned that it sounds like maybe you're now seeing those empty boxes filling up. So, I'm just wondering. I know you said it's hard to find good data.
Speaker Change: I'd say that.
Speaker Change: As I said earlier I don't think the markets any more competitive now than it has been.
Speaker Change: And I think the large players are going to benefit.
Speaker Change: And our challenge and our mission is to benefit more.
George L. Holm: So, for sure, it's much harder for us than for you. But where are we in terms of the recovery back to the prior peak restaurant count? Just trying to get your sense of those boxes filling back up again, which is pretty good for everybody. Yeah, that's hard to tell.
Speaker Change: Then the other the other guys I guess.
Speaker Change: But.
Speaker Change: Good industry and it is.
Speaker Change: Continuing to consolidate.
Speaker Change: And I think there's a lot of room for a lot of people.
Speaker Change: In this type of business.
Speaker Change: Thank you.
John Heinbockel: I can say that in my travels, I don't see many empty restaurants anymore. I probably wouldn't have said that even six months ago. So I think they're filling up. I look at our number of accounts, and we're so far ahead of 2019 as far as the number of accounts, particularly independent restaurants, go. Um, I think that for the health of the industry, I hope that we don't get overbuilt again. I think we're in a pretty good spot.
Speaker Change: Thanks.
Speaker Change: Okay.
Speaker Change: And do we have our next question from Lauren Silberman with Deutsche Bank.
Lauren Silberman: Thank you.
Lauren Silberman: A couple on guidance I think you said this fiscal year is tracking at the low end of the $59 million to $60 million range have you have bad because this is highly driven by lower inflation than you would've expected anything else a little bit different than expectations.
Lauren Silberman: Yeah, Lauren this is Patrick.
Lauren Silberman: It is due a little bit to that and it's also due to the fact that we've been speaking for several quarters about our beliefs on what deflation in foodservice would do and when inflation would do.
George L. Holm: And actually, just lastly, the independent segment. I know you mentioned it's always competitive and you continue to invest in your sales force. I think you mentioned it's up 8% year on year. It sounds like some of your peers are perhaps more aggressively doing something similar. So I'm wondering whether you're finding any incremental challenge, finding good labor, or increased turnover, or anything that's making it harder for you to pursue what you've always done because other players are now getting more aggressive going after similar independent sales people. Thank you.
Lauren Silberman: <unk>.
Lauren Silberman: Fifth star and convenience.
Patrick Hatcher: Deflation in food service, it's just been a little slower as I've mentioned in my comments to move it Directionally want wanted to is moving in the correct direction. It's just hasn't gone to inflationary than we would've expected that to happen will sooner. So.
Patrick Hatcher: Doesn't change dramatically, but it did.
George L. Holm: Yeah, you know, I would say that, as I said earlier, I don't think the market's any more competitive now than it has been, and I think the large players are going to benefit. And our challenge and our mission is to benefit more than the other guys. But, you know, it's a good industry, and it is continuing to consolidate. And I think there's a lot of room for a lot of people in this type of business. Thank you. Bye.
Patrick Hatcher: That's a little bit there and then also we've already touched on the January effect as well.
Patrick Hatcher: A big one for us from a deflation standpoint.
Patrick Hatcher: <unk>, particularly cheese that goes on a pizza.
Patrick Hatcher: And we greatly over index in that area and the way in which we run our business.
Patrick Hatcher: Where many of our customers our agreement with them is over the block market.
Patrick Hatcher: As far as how we price them.
Patrick Hatcher: Thank you. A couple of questions on guidance. I think you said the fiscal year is tracking at the low end of the $59 to $60 billion range. As you look back, is this entirely driven by lower inflation than you would have expected? Is anything else a little bit different than expectations? Yeah, Lauren. This is Patrick.
Patrick Hatcher: And often.
We've done well from an inventory standpoint by anticipating price increases and anticipated deflation and making sure our inventory is.
Patrick Hatcher: As low as possible during deflationary times and the size possible torn inflationary times within that category.
Patrick Hatcher: But once again, we achieved the way we run our business where.
Patrick Hatcher: It is due a little bit to that, and it's also due to the fact that, you know, we've been speaking for several quarters about our beliefs about what deflation and food service would do and what inflation would do, and vis-a-vis our inconvenience. Deflation and food service have just been a little slower, as I mentioned in my comments, to move in the direction we wanted to. But it is moving in the correct direction.
Patrick Hatcher: The age that we put on the product is extremely important to us.
Patrick Hatcher: And.
Patrick Hatcher: We have just been taking those losses.
Patrick Hatcher: On the inventory as cheese has continued to go down in price and we finally have seen that turn the other way.
And within a few weeks in a row where into block market has gone up so that's going to be a positive for us.
George L. Holm: It just hasn't gone to inflationary, and we would have expected that to happen a little sooner. So, it doesn't change dramatically, but it did impact us a little bit there, and we've already touched on the January effects as well. And the big one for us, from a deflation standpoint, is cheese, you know, particularly cheese that goes on pizza. And we, you know, greatly over-index in that area, and the way in which we run our business, are many of our customers. Our agreement with them is over the block market, as far as how we price them. And often
Patrick Hatcher: If that continues or even stabilizes, but I think that is.
Patrick Hatcher: Part of it is 59% to 60 billion I think another part of it.
Patrick Hatcher: Is that.
Patrick Hatcher: <unk>.
Patrick Hatcher: Cigarette volume typically goes down that range of about 4% and it's been higher.
Patrick Hatcher: Which is fine.
Patrick Hatcher: That's just.
Patrick Hatcher: Big dollar sales that don't come with a lot of profit, but something you have to have to be in the business. We're in so that contributes to it and I think that.
Patrick Hatcher: That's probably about it.
Patrick Hatcher: Yeah.
Speaker Change: Great Super helpful.
Speaker Change: Clarifying just the second half guide the fiscal third quarter and I know, we talked about January and inflation to what extent is are you guys embedding like more of a return to normalized seasonality and this is a function of cadence just given.
George L. Holm: We've done well from an inventory standpoint by anticipating price increases and anticipating deflation and making sure our inventory is as low as possible during deflationary times and as high as possible during inflationary times within that category. But once again, which is the way we run our business where the age that we put on the product is extremely important to us, and we have just been taking those losses on the inventory as cheese has continued to go down in price, and we finally have seen that turn the other way. And we've had a few weeks in a row where the block market has gone up.
Speaker Change: You reiterated the full year guide versus some of these more idiosyncratic.
Speaker Change: Tax and fiscal third quarter.
Speaker Change: Yes, I think it's a lot of that of US trying to just help give some cadence to the quarters in <unk>.
Speaker Change: Give you that.
Speaker Change: The ability to understand the cadence that we're seeing so it's much more what you described the former than the latter.
George L. Holm: So, you know, that's going to be a positive for us if that continues or even stabilizes. But I think that's a part of this 59 to 60 billion. I think another part of it is that cigarette volume typically goes down at a rate of about 4%, and it's been higher, which is fine. That's, you know, big dollar sales that don't come with a lot of profit but something you have to have to be in the business we're in. So that contributes to it. And I think that's probably about it.
Great and then just last one on the fiscal 'twenty guide fiscal 'twenty four come in at the low end of the fiscal 'twenty Bad Guy can you just help frame a little bit how we should be thinking about fiscal 'twenty five.
Speaker Change: Yes, I mean, we've.
Speaker Change: We've continued to reiterate that guidance.
Speaker Change: And I think we've said that we felt really comfortable about coming in right in the midpoint of that guidance. So I think that's we continue to see really positive things in and that's why we continue to reiterate that particular guidance.
Patrick Hatcher: I think so. Yeah. Great, super helpful.
Patrick Hatcher: Clarifying just the second half guide, the fiscal third quarter, and I know we talked about January installation, to what extent are you guys embedding more of a return to normal seasonality? And this is a function of cadence just given you reiterated the full year guide versus some of these more idiosyncratic impacts in the fiscal third quarter. Yeah, I think it's a lot of us trying to just help give some cadence to the quarters and give you that ability to understand the cadence that we're seeing. So it's a lot. It's much more what you described in the former than the last. Great. And then just last one on the fiscal 25 guide, fiscal 24, comes in at the low end of the fiscal 25 guide. Can you just help frame a little bit how we should be thinking about fiscal 25?
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: And our next question comes from Andrew Wolf with C. L King.
Speaker Change: Okay.
Speaker Change: Okay.
Andrew Wolf: Good morning.
Andrew Wolf: Wanted to ask on the.
Andrew Wolf: Your commentary that the penetration with independent customers is improving.
Andrew Wolf: Maybe could you elaborate a little bit on like what parts of the sales process.
Andrew Wolf: Yes.
Andrew Wolf: He is being applied as a differentiation.
Andrew Wolf: Service.
Andrew Wolf: Are there pricing algorithms that maybe they get more confident with just help us understand why that's happening.
Speaker Change: While we don't have pricing algorithms, so that would have anything to do with it.
Patrick Hatcher: Yeah, I mean, we've continued to reiterate that guidance. And I think we've said that we feel really comfortable about coming in right in the midpoint of that guidance. So I think that's, you know, we continue to see really positive things. And, and that's why we continue to reiterate that particular guidance. Thank you. Good morning.
Speaker Change: Okay.
Speaker Change: We train our people and we train them to be equipped with the best product knowledge possible.
Speaker Change: And.
Speaker Change: Therefore, they have the knowledge.
Speaker Change: As to those accounts and Andy it's really no more complicated than that.
George L. Holm: I wanted to ask about your commentary that the penetration with independent customers is improving. Maybe you could elaborate a little bit on what parts of the sales process are being applied as a differentiation service. Are there pricing algorithms that, you know, maybe they get more confident with?
Speaker Change: Okay.
So would you call it basically persuasive selling in and showing up that kind of a combination.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: The other question I really wanted to get into was the better operating expense much better.
George L. Holm: Just help us understand why that happened. Well, we don't have pricing algorithms, so that wouldn't have anything to do with it. You know, we train our people. We train them to be equipped with the best product knowledge possible. Therefore, they have the knowledge to add to those accounts. And Andy, it's really no more complicated than that.
Speaker Change: The convenience store.
Speaker Change: Distribution business and.
Speaker Change: And just by what.
Speaker Change: What youre detailing.
Speaker Change: Temporary help and overtime I wasn't sure if that's.
Speaker Change: Better results.
Speaker Change: <unk> to the other two segments foodservice investor or whether they're actually lagging maybe because there's a lot of <unk>.
George L. Holm: So would you call it basically persuasive selling and showing up, that kind of a combination? Yeah. Okay.
George L. Holm: And, The other question I really wanted to get into was the better operating expense, much better in the convenience store distribution business. And just, you know, by what you're detailing, you know, temporary help and overtime. I wasn't sure if that was better results relative to the other two segments, food service and Vistar, or whether they're actually lagging, maybe because, you know, there's a lot of tougher to hire people. So they had to hang on to overtime and temps longer. I'm just trying to get a sense of whether it is really a better performance.
For to hire people so they had to hang on to.
Speaker Change: Overtime in temps longer I'm, just trying to get a sense of is it really a better performance or is it more sort of they're just catching up in terms of kind of getting back to having hiring full time folks well they would tell you.
Speaker Change: Shows in their numbers.
Speaker Change: From an operational standpoint goes fast right now that they've ever been to putting out.
George L. Holm: Or is it more sort of, they're just catching up in terms of kind of getting back to having, you know, hiring full-time folks? Well, they would tell you, and it certainly shows in their numbers, from an operational standpoint, they're the best right now that they've ever been at putting out really good levels of service. And, you know, they're paying people well and getting good productivity for what they pay them. And I just think it's a really good situation. They were very focused on it, certainly hitting it hardest. And, as I said, they came back. The fastest, and they came back to, you know, their pre-COVID level and continue to improve.
Speaker Change: Really good levels of service.
Speaker Change: And they are paying people well, we're getting good productivity for what they pay them and I just think it's a real good situations. They were very focused on it.
Speaker Change: Certainly hit the hardest.
Speaker Change: As I said they came back.
Speaker Change: The fastest and they came back to you.
Speaker Change: Pre COVID-19 levels.
Speaker Change: And continue to improve.
Speaker Change: Just a real good situation and we need that we've got business coming on we've got to be prepared for it and I think we're in great shape.
Speaker Change: As that comes in.
Speaker Change: The only thing I'll add is.
Speaker Change: Yes.
Speaker Change: Specifically speaking to the warehouse and not to oversimplify things, but.
The type of worker that we have the highest especially in foodservice, Georgia refers to as the industrial athletes they have to be a very physical.
George L. Holm: It's just a really good situation, and we need that. We've got business coming up. We've got to be prepared for it, and I think we're in great shape as that comes in. The only thing I'll add is just specifically speaking to the warehouse, and not to oversimplify things, but the type of worker that we have to hire, especially in food service, and George refers to as the industrial athlete, they have to be very physical. The, you know, again, not trying to oversimplify it, but on the convenience side, a lot of times they're picking each is or a small tax. So it can be a less demanding job and, therefore, might be a little easier to hire for. So, I think that's helped them in their ability to really drive that. Yeah, I was gonna ask that sort of structural kind of question.
Speaker Change: Again, not trying to oversimplify, but on the convenience side a lot of times. They are picking each is our small tax so it can be less demanding job and therefore might be a little easier to hire for us. So I think that's helped them and their ability to really drive that opex slower.
Good Yeah, I was going to ask that sort of structural kind of question how about on service rates expectations by the customers can convenience get a little more aggressive.
Speaker Change: Not having excess labor because maybe their customers a little more tolerant of a start.
Speaker Change: Lower service level or is it more just patches.
Speaker Change: Okay.
George L. Holm: How about service rates, you know, expectations by the customers? Can convenience get a little more aggressive? In, you know, not having, you know, excess labor, because maybe their customers are a little more tolerant of, stock, you know, a lower service level, or is it more what dispatches? No, I think it's almost the opposite. The convenience customer, you know, they don't have any like real back stock.
Speaker Change: No I would say, it's almost the opposite the convenience customer they don't have any like real backstop. So.
Speaker Change: If we're not making deliveries and providing great service levels.
Speaker Change: Theyre going to have empty shelves and so no they have to be really good at that service level.
Speaker Change: Okay.
Got it. Thank you and we are we are seeing we are seeing some improvement on the inbound.
Speaker Change: And for whatever reason.
George L. Holm: So if we're not making deliveries and providing great service levels, they're going to have empty shelves. And so now they have to be really good at that service. Got it. Thank you.
Speaker Change: The convenience and the Vista, our suppliers just have not been able to get their service levels back to pre COVID-19.
Speaker Change: And in foodservice, we've seen people get back to pre Covid service levels and fill rates.
George L. Holm: And we are we are seeing we are seeing some improvement on the inbound and, you know, for whatever reason. The convenience and the Vistar suppliers just have not been able to get their service levels back to pre-COVID. And in food service, we've seen people get back to pre-COVID service levels and fill rates. Salih, with B-T-S-I-L-L-I-N-G-I-N-G-I-N-G-I-N-G-I-N-G-I-N-G-I-N-G-I-N-G-I-N-G-I-N-G, Great, thanks.
Speaker Change: And we do have our next question from Peter <unk> with BTG.
Peter: Great. Thanks, So I want to come back to the comment around some of the operators, adding hours and days of operating days.
Peter: Labour returns to more normal is this.
Peter: More recent trend that youre seeing in the fiscal second quarter or has this been going on for several quarters now and maybe can you just help us and comment on.
George L. Holm: So I want to come back to the comment about some of the operators adding hours and days of operating days as labor returns to more normal. Is this a more recent trend that you're seeing in the fiscal second quarter, or has this been kind of going on for several quarters now? And maybe you could just help us and comment on, you know, daypart mixes.
Peter: Day part mix is what are you seeing maybe by.
Peter: Lunch and dinner are there and are there specific cuisines that are kind of outperforming given this dynamic.
Peter: Well, what I've seen as far as people expanding hours again, adding more days I think thats the function of how they've gotten labor back and thats different market by market.
George L. Holm: What are you seeing maybe by lunch and dinner? And are there specific cuisines that are kind of outperforming given this dynamic? Well, what I've seen as far as people expanding hours again and adding more days, I think that's just a function of how they've gotten labor back, and that's different market by market. But I'm just seeing it as a trend that's, I think, helping us as far as cuisines and how they're doing.
Peter: But I'm just seeing it as a trend that's I think helping us.
Peter: As far as cuisines and how theyre doing.
Peter: Certainly no expert on that but I can tell you what I see first of all is.
Peter: Third party delivery.
George L. Holm: I'm certainly no expert on that, but I can tell you what I see, first of all: third-party delivery has made delivery much more than pizza and Asian food. And I think it's been good for a lot of restaurants. Now, when we look at the SKUs that we have that lean towards take-out and delivery, it certainly isn't as high as it was during COVID, but it's higher than it was pre-COVID.
Peter: <unk> made.
Peter: Delivery.
Peter: Much more than pizza.
Peter: Asian food.
Peter: And I think it's been good for a lot of restaurants, now and when we look at.
Peter: The skus that we have.
Peter: That.
Peter: Lean towards.
Peter: Takeout and delivery.
It certainly isn't as high as it was during COVID-19, but it's higher than it was pre COVID-19. So that in itself tells me that people did change their behavior somewhat.
George L. Holm: So that in itself tells me that people did change their behavior somewhat, and that product is conducive to takeout and delivery. It's probably benefited, and restaurants that can do takeout and delivery have benefited. I'm not so sure I see a big change in general for what cuisines people eat. Um, you know, I think there was some fatigue around pizza, and that seems to have, and a cycle back out. And then, you know, I would also say that some of the areas where they overshot on price have resulted in some weakness. And I'll throw pizza in that too.
Peter: And that.
Peter: Product that.
Peter: Is conducive to takeout and delivery.
Peter: It's probably benefited in restaurants.
Peter: Do takeout and delivery have benefited.
Peter: So sure I see a big change in in general for what proceeds people eat.
Peter: I think there was some fatigue around pizza and that seems to.
Peter: Kind of cycling back out.
Peter: And then.
Peter: I would also say that some of the areas, where they overshot on pricing that that has.
Peter: Resulted in some softness.
Peter: And also a pizza in that too.
George L. Holm: Now breakfast has come back strong. And I think that's a function of people working, and, You know, working in the office, and breakfast is very, very habitual, and you know, that they're back going to going to at least the ones that we supply that have breakfast at really made a nice comeback. Thank you, that was very helpful. Just on Monday and Friday morning, I think you also mentioned Monday and Friday morning traffic was still, I believe, light. Is that something now with your comments on breakfast? Are you expecting that?
Peter: No breakfast has come back strong and I think that's a function of people working.
Peter: And.
Peter: Working in the office.
Peter: It's a very breakfast is very habitual.
Peter: And.
Peter: They are back going to going to at least the ones that we supply that they have a breakfast.
Peter: It's really made a nice comeback.
Speaker Change: Thank you that was very helpful. Just on the <unk>.
Speaker Change: Monday and Friday, I think you also mentioned Monday, and Friday morning traffic. It was still I believe soft with is that something that now.
Speaker Change: Your comments on breakfast are you expecting that.
George L. Holm: Um, kind of to improve in calendar 24 as more return to office is happening. Yeah, that's, Thank you very much. So guys, I wanted to start with Vistar, right?
Speaker Change: Kind of to improve in calendar 'twenty four as more return to office.
Speaker Change: It is happening.
Speaker Change: Yes definitely.
Speaker Change: Thank you very much.
Speaker Change: And just a reminder, if you would like to ask a question. Please press star and one on your telephone keypad now.
And our next question comes from John <unk> with Guggenheim Securities.
John: Hey, guys wanted to start with the star right.
Patrick Hatcher: And I know you referenced in the release, particularly in SG&A, the impact of an acquisition, which I think was Green Rabbit, maybe for Patrick, you know, impact on the P&L, is that a near-term weight? And then maybe for George, strategically, Green Rabbit's impact on Vistar, and particularly the fulfillment business? You know, what does that do?
John: You referenced in the release, particularly.
Particularly on SG&A right the impact of an acquisition, which I think was green rabbit.
John: Maybe for Patrick.
John: Impact on the P&L is that is that a near term weight.
John: And then maybe for George strategically bright green rabbits impact on this storm, particularly the fulfillment business.
John: What does that do and can that move the needle in that in that business.
George L. Holm: And can that move the needle on that business? Yeah, thanks, John. There's a couple things going on at Fistar this quarter, just to highlight them.
Speaker Change: Yes, Thanks John.
Speaker Change: There's a couple of things off they started the quarter just to highlight I mean, obviously, we've added the acquisition then.
Patrick Hatcher: I mean, obviously, we've added the acquisition in, and that is showing up in OffX. And then the thing that's not really obvious, or maybe you've figured it out, but it's just the gross profit looks muted because of those inventory gains in the prior year versus this year. So, if you were able to strip out the inventory gains from last year in the acquisition, the gross profit to OffX is still growing about double at Fistar. So, we're really comfortable with how Fistar's performing.
George L. Holm: And that is showing up in opex.
Speaker Change: The thing Thats, not really obvious or maybe you can figure it out but it's just the gross profit looks muted because of those inventory gains in the prior year versus this year.
Speaker Change: So if you were able to strip out those gross the inventory gains from last year and the acquisition the gross profit to Opex.
Speaker Change: Growing about double if it starts so we're really comfortable with <unk> performing youre, just getting a lot of noise asset acquisitions getting added into the P&L and you have that year over year comp from inventory gains I'll turn it over to George from a strategic standpoint, I mean this.
George L. Holm: You're just getting a lot of noise as that acquisition gets added to the P&L, and you have that year-over-year comp from inventory gains. So, I'll turn it over to George. Yeah, from a strategic standpoint, I mean, the whole e-commerce area is something we've been at for quite a while. We were doing it out of several of our VISTAR facilities for a few years. And Pat Haggerty, you know, ran the Vistar business, and his idea was to go to something that's semi-automated, and we had enough volume where we didn't need the benefit of the Vistar business to bring the product in by truckloads. So we did one, and then we did two more of the semi-automated facilities, and they're like $30 million dollar plants. So, you know, they're very expensive to do. So we talked to the Green Rabbit people for a long time. They have three distribution centers as well, like we do, but two of them are smaller than ours.
George L. Holm: The whole E Commerce area is something we've been at for quite a while.
George L. Holm: We were doing it out of several of our historic facilities.
George L. Holm: For a few years.
George L. Holm: <unk>.
George L. Holm: He ran the <unk> business.
George L. Holm: His idea was to go to something that semi automated we had enough volume, where we didn't need the benefit necessarily.
George L. Holm: The fifth star business to bring the product in truckloads.
George L. Holm: So we did one and then we did two more of the semi automated facilities in Malaysia 30 million Pops, so they're very expensive to do.
George L. Holm: So we talked to the Green rabbit people for a long time.
George L. Holm: They have three distribution centers as well like we do.
George L. Holm: Two of them are smaller than ours, one is actually.
George L. Holm: One is actually quite large, but the larger one also does refrigerated and frozen, which we don't do from an e-commerce standpoint. Now, we have the right temperatures to do chocolate, but not for refrigerated and frozen products. So, you know, for us, it takes us to six, that gives us the ability to do those other two product areas, and the expertise that we're getting with the people that run that business is exceptional, and The products, you know, they all hit the suppliers from which we buy from. So from a strategic standpoint, it's a big one for us. And it's really important, and we had gotten those three centers to where they were actually, from an EBITDA margin standpoint, more profitable than a regular VISTAR distribution center. Now, part of that, as I've mentioned before, too, is that we don't have 8 physical. Possession of all of the products.
George L. Holm: Quite large but the larger one also does refrigerated and frozen, which we don't do an e-commerce standpoint that we have the right team.
George L. Holm: <unk> to do chocolate, but but not for refrigerated and frozen product.
George L. Holm: So for US it takes us to fix that gives us the ability to do those other two product areas.
George L. Holm: And.
The expertise that we're getting with with the people that run that business is exceptional.
George L. Holm: And.
George L. Holm: The products that they all hit to suppliers in which we buy from.
George L. Holm: So from a strategic standpoint, it's a big one for us and that's really important.
George L. Holm: <unk>.
George L. Holm: We had gotten those three centers to where they were actually from a EBITDA margin standpoint more.
George L. Holm: A more profitable than a regular Vista distribution center now part of that as I've mentioned before too is that we do.
George L. Holm: <unk>.
George L. Holm: Eight physical.
George L. Holm:
George L. Holm: Possession of all of the products, so and some of it.
George L. Holm: And some of it, the margin and the sale are the same. We don't have the cost of goods, so that obviously helps, but this is a big part of our future within Vistar. Great.
George L. Holm: The margin Enzo sale are the same we don't have the cost of goods. So that obviously helped.
George L. Holm: But this is a big part of.
George L. Holm: Our future within the store.
Speaker Change: Great and then maybe a follow up just quick on foodservice right.
John Heinbockel: And then maybe follow up just quick on food service, right? Do you think this business is still, because I think you'd argue right that if you're growing independent case growth, six to 7% with a little inflation, right, and a little chain business growth, this is a high single-digit EBITDA growth business. Would you still agree with that?
Speaker Change: Do you think.
Speaker Change: Is this business still.
Speaker Change: Because I think you'd argue right that if youre growing independent case growth, 6% to 7%.
Speaker Change: With a little inflation right.
Speaker Change: Little chain business growth.
Speaker Change: This is a high single digit EBITDA growth business.
George L. Holm: And we haven't been there because of the Salesforce investment. Do we get back there in the early part of fiscal 25 or not, do you think? Well, we have eight distribution centers, which are strictly restaurant chain distribution centers. So, you know, they're not going to put out those kind of, Right?
Speaker Change: Are you still agree with that and we haven't been there because of the sales force investment do.
Speaker Change: Do we get back there.
Speaker Change: The early part of 'twenty fiscal 'twenty five.
Speaker Change: I think.
Speaker Change: Well, we have eight distribution centers, which are strictly restaurant chain distribution centers.
Speaker Change: I'm not going to put out those kind of alright.
George L. Holm: Profitability. We, you know, we know the business. We know what the profit levels are. We make acquisitions, um, where we are a full broad line company. We have a very good Ipeta Margin where we are not, and we have a blend of chain business, and we have a large volume of cheese business, which comes with high 70s, 80s, sometimes over $100 cases. You know, you're not going to make those kind of margins.
Speaker Change: Alright profitability.
Speaker Change: We know the business, we know what the profit levels are we make acquisitions.
Speaker Change: Where we are full broad line company.
Speaker Change: We have very good EBITDA margins.
Speaker Change: Where we are not and we have a blend of.
Speaker Change: The chain business.
Speaker Change: And we have.
Speaker Change: A large volume of cheese business.
Speaker Change: Which comes with.
Speaker Change #100: Hi, <unk> <unk>, sometimes over 100 dollar cases, youre not going to make those kind of margins.
Operator: But for us, I think the biggest thing to follow with us is that we're going to continue to lower EBITDA margins within that business, particularly where it's a broad line facility. And we're going to continue to invest like we have invested, not to the degree we have lately. And, you know, we just felt like we were going to get our independent growth back up to, you know, kind of where it was pre-COVID. And we were going to invest in that and make sure that we got that done. And I see our food service business getting, as far as a return on sales, becoming more and more profitable. Thank you. Thanks, John, and we have Thank you for joining our call today. If you have any follow-up questions, please contact us at Investor Relations. Thank you. That does work.
Speaker Change #100: Us.
Speaker Change #100: I think the biggest thing to follow with us as that.
Speaker Change #100: We're going to continue to lower EBITDA margins within that business, particularly.
Speaker Change #100: Where it's a broadline facility.
Speaker Change #100: And we're going to continue to invest like we have invested not to the degree we havent lately.
Speaker Change #100: And we just felt like we were going to get our independent growth back up to.
Speaker Change #100: To kind of where it was pre COVID-19 and we were going to invest against that and make sure that we got that done and I see our foodservice business getting.
Speaker Change #100: As far as the return on sales getting more and more profitable.
Speaker Change #101: Thank you.
Speaker Change #102: Thanks, John.
Speaker Change #103: And we have no further questions in the queue.
Speaker Change #103: The queue that will conclude our Q&A session for the day and I will turn it back over to Bill Marshall for closing comments.
Bill Marshall: Thank you for joining our call today do you have any follow up questions. Please contact us at Investor Relations.
Bill Marshall: Yes.
Bill Marshall: Thank you that does conclude today's teleconference. Thank.
Thank you for your participation you may now disconnect.
Bill Marshall: Okay.
Operator: Thank you for watching!
Bill Marshall: [music].
Okay.