Good morning, and welcome to the Performance Food Group Third Quarter Fiscal 2016 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by PFG's management and the question-and-answer session. I would now like to turn the call over to Mr. Michael Neese Vice President and Investor Relations for PFG. Please go ahead, sir.

Thank you, Crystal. Good morning and thank you for joining us. We are here there morning with George Holm, Performance Food's CEO; and Bob Evans, Performance Food Group's CFO to discuss our third quarter fiscal 2016 business results. During our call today, unless otherwise stated, we are comparing third quarter and first nine month results versus the same period in fiscal 2015. Earlier this morning, we issued a press release regarding our third quarter results. You can find our earnings release on the Investor Relations section of our website at pfgc.com. Our remarks and the earnings release contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking statements section in today's earnings release for various factors that could cause actual results to differ materially from projections. On today's call, we may reference certain non-GAAP financial measures. Descriptions of these non-GAAP financial measures and reconciliation to the most closely comparable financial measures calculated in accordance with GAAP are included is today's earnings release and in our presentation slides. Now, I would turn the call over to George.

Thank you, Michael. Good morning everyone and thank you for joining us today. PFG's results for the third quarter were strong and in line with our expectations. Our double-digit adjusted EBITDA growth for the third quarter and first nine month reflect strong performances in our businesses. We grew our total cases by 4.11% and we feel we gained market share. Our largest segment Performance Food Service posted its 27th consecutive quarter of growing its independent case volume in excess of 6% over the prior year and our proprietary performance brand case volume grew by double-digit. And we expanded margins to a combination of improved mix and effective cost management across our entire Company. Our strategic initiatives remain on track and as a result we have increased the bottom end of our EBITDA growth outlook from 9% to 10%, such so that our new EBITDA growth outlook for this fiscal year is 10% to 12%, reflecting our strong year-to-date results. These results reflect the strength of our diversed business model with the focus on strong independent restaurant and proprietary brand growth in Performance Food Service. Consistent chain restaurant business in PFG customize in growth in Vistar’s candy snack and beverages business. We couldn’t achieve these results without the efforts of PFG's great people. I’d like to highlight an unselfish act by one of them in March, while making a special delivery in Lebanon, Tennessee Brad Anderson where Performance Food Service witnessed a vehicle veer off the roadway into a parking lot. Realizing that the driver was in distress and experiencing a medical emergency Brad pulled over and rushed to the driver's side to offer aid and to ensure the driver got the medical attention needed. The orderly drive had just left the dialysis treatment and experienced a drop in blood pressure,…

Thanks, George. Before I get into my prepared remarks, I want to take a moment to say thanks to George, our Board, certainly my finance team and really all the PFG people who have made this such a great adventure for me, the past seven years. I think we have built the best growth company in the Foodservice industry. I mean, we grew during a recession, we have grown during a recovery, we have grown organically, we have grown through acquisitions, and not only have we grown the topline, but we’ve also grown our margins too. So, I am really proud to have been part of this team and as well as we have done I am completely confident that PFG's best days lie ahead. I contend to remain a shareholder for quite some time to come. So George, you're the architect of our growth and our leader, so let me thank you personally as well. Okay. Now, for those prepared remarks. I will briefly go through our detailed financial results, discuss our cash flow and balance sheet, and wrap-up with our fiscal 2016 outlook. Our third quarter results saw PFG successfully grow both share and profit margins. Third quarter case growth of 4.1% continued to exceed forecasts for industry real growth. Gross profit dollars rose 6.5% to $481 million and our gross profit per case rose 20 basis points. This increase in gross profit per case was driven by favorable mix shifts, especially towards independent and performance brands in our Performance Foodservice business. Operating expenses rose 4.4% or 30 basis points per case as a result of fixed cost leverage, initiatives undertaken to reduce operating expenses, an lower fuel prices. The combination of strong case growth and the favorable spread between gross profit and operating expense per case enabled…

[Operator Instructions] And your first question comes from the line of John Heinbockel with Guggenheim Securities.

Hey, George, a question, if you break your independent case growth down into existing customers, right more with them and the new customer additions, how does that break down percentage-wise roughly? Has that changed a lot in the last, I don’t know, maybe two years and I'm thinking is it more difficult because a lot of your competitors are more focused on independent case growth as well. Is it more difficult to win over a new customer than it might have been a couple of years ago?

Well, we don't give those numbers, but I can give you a kind of some general statements, I guess, here.

Yeah.

The biggest part of our growth comes from new customers and that's been the case as long as I have been in this business and looking at that new [indiscernible] penetration. Where we have been improving, I think that's why we're seeing some kind of continued improvement as the year goes in our independent growth and we're getting closer to that top end of our range. Actually, in March, we were able to exceed it is because we're not losing quite as much business as we have in the past. I think that's just a reflection maybe of the independent being a little more stable ground financially and we're penetrating a little better than we were before within existing customers. I mean I would like to think part of that is that we're doing a better job, but I also think that's a reflection that the independent customer is a little stronger than they used to be. But if you really look at those three components of new business and lost business and how we're penetrating, it really hasn't changed that much over the last five years. Just slightly better with the loss and slightly better with the penetration.

And then, obviously, it would have a positive impact, right? You think about those components that would be – the margin composition of that of losing less and penetrating more is incrementally better, right?

Yeah. I think that's one of the reasons why we're just under 20% growth in EBITDA in that division for us so far this year. I think they're getting a great benefit from that.

All right. And then just secondly with regard to the Red Lobster on boarding, is there any capital that you have to outlay for that and any up front integration cost that you might bear early in the next fiscal year and then how do you think about sort of the incremental profit margin, whence you bring on the $500 million obviously it leverages fixed assets. So you would think the incremental margin to you is better than the average, you know, how do you think about that?

Yeah. I'll try not to make this too long an answer. If you look at our numbers for last quarter for customized, you see that we had a fairly substantial drop in our case growth. Our customers aren't struggling that much. Part of it is because we have not renewed some contracts, not real large accounts, but to make the capacity to handle Red Lobster available, and as we get into this -- deeper into the fourth quarter, we're going to have a little bit more of that. We are not trimming our number of drivers or our number of warehouse people because we want those fully trained people onboard. We're utilizing seven of our distribution centers and those seven centers by that time will pretty much be – well, they will be entirely full-service restaurants. The Red Lobster contract and how we do business with them is real consistent with our other contracts. So we do feel even though it's very low gross margin business that will be accretive as far as EBITDA as a percent of sales or our EBITDA ratio is for our customized business. The other thing with it is that when we look at the SKU base of the contracts that we're not renewing versus the SKU base for Red Lobster, we will not be adding additional SKUs at all so we will not need any brick-and-mortar for this business and we're going to need just slightly less than 50 new drivers, so for the most part we will have that driver pool on hand because of the business that we're not renewing and we will be getting those drivers on early. We still have I think as the whole world knows there's still a driver shortage, so we're making sure we get them on early, we get them fully trained and ready to go. And then we will have a business there that will be quite accretive for customized and we'll also at the same time add a $0.5 billion on revenues, but it will actually reduce the complexity of the business.

Okay. Thank you.

Your next question comes from the line of Vincent Sinisi with Morgan Stanley.

Great. Thanks very much for taking my question. Good morning, guys. And, Bob, let me – was sorry to read the upcoming retirement, but certainly wish you all the best and happiness in the upcoming retirement for you there.

Thanks, Viny.

But just wanted to ask you guys, just kind of more theoretically first question, just kind of on the national account focus and obviously a nice win with Red Lobster, is the right way to look at it that of course the major focus is as you said the higher margin, more independent type of customers, but within more of the customized and larger accounts, is it basically a focus where you're going to be going after the highest volumes possible because that does ultimately help the overall margin and maybe not so much of a focus on maybe kind of the mid and smaller tiered accounts on that side of the business? Is that kind of how we should theoretically think of it?

Well, I think for the seven distribution centers that the Red Lobster business is going into, you do things in this business and you learn from what you do, but those buildings are really geared to the large family dining, casual dining type of customer. Our expense ratios are very low as we introduce the different type of customer; we found our expense ratios went up, not down. And this is a little bit kind of going back to our roots. And within that type of distribution center, yes, this is the type of business that fits for us and that's not to say that we won't continue to pursue other types of national accounts, but we're more likely to handle those out of our performance food service division.

Okay. That makes sense, George. Thank you. And then maybe just a quick follow-up just in terms of the deflation number, the 11.3% that you guys mentioned. Maybe just by category kind of what was in line or out of line versus your expectations? And just general thoughts how you see that going forward.

Yeah, for the most part the story is unchanged from last quarter. It's the proteins that we're seeing the deflation. It's just not quite to the extent that it was before. As we have gotten into our – a month into our fourth quarter, we're really continuing to see pretty much the same. We’ve got some relief from deflation in the dairy category just by lapping the real low pricing. I think that poultry and seafood are harder for us to get a handle on what's coming up, but it does appear as if meat, there's very in expensive feed demand is down, particularly export and we think that that will probably continue to -- to be in a deflationary kind of mode.

Okay. Thank you, George.

Most of our other categories were not experiencing deflation right now.

Got it. Okay. Best of luck.

Yeah. Thanks.

Your next question comes from the line of Zack Fadem with Wells Fargo.

Hi, guys. There's been so much focus on the independent customers; I'm actually curious how the chain customers are doing within the broad line business. I know you have some faster growing chains in there. Perhaps you could update us on how that business has been trending and how do you think about growth for those customers relative to the market?

Well, some of the newer ones that we have particularly are showing very good growth in both stores and same-store sales. We're real careful not to comment on any specific customer, that's more of their job. But if you look at our chain business as a whole from the same-store sales point, it has been soft. Interestingly, March was our peak and independent as far as same-store sales and it was our trough in national accounts, so it just kind of is what it is today. The newer ones are – many of them are doing very, very well, but it was certainly a softer quarter for that type of business.

Okay. Thanks.

Yeah, sequentially we have been a little bit slower with case growth. Obviously, it hasn't had an effect on the bottom line, but all of that softness in excess of 100% of it actually is in our national accounts segment.

Okay. And when looking at just gross profit growth in excess of your operating expenses, you know, you’ve done a really nice job hereof growing the spreads by at least 1% over the next -- over the last two years. As we look over the next couple ever quarters, do you think this can continue or would you expect that spread to begin to level off over the next couple of quarters particularly with the new Red Lobster business coming on?

Well, as a percent of sales you're certainly going to see it continue because of the size of Red Lobster and it has very high case cost and a lot of seafood and that's why we really need to look at it kind of segment by segment. But in our biggest category in Performance Food Service I think we'll continue to grow our gross profit dollars at a faster rate than our sales. In Vistar that's something that we have always done. This was an unusual quarter from us from the standpoint that we did grow our sales faster than we grew our EBITDA. We’ve brought some business that started this week that we brought on that we needed to get the drivers in place. We had to do some re-racking and some re-slotting to get set up to handle the business. It's a dollar store business. It's business that we handle in other parts of the country. We just picked it up in new geographies. So we know we will climb the learning curve quick, but we did experience some cost increases kind of getting ready there, but I expect them to be able to turn that around and begin to grow their gross profit faster than their cases as well.

Okay. And if I could just ask one more, George, the $500 million of annual new Red Lobster business, is that net of the business exits that you're talking about or the decision not to renew certain customized contracts?

That is a net number, correct.

Okay. Perfect. Thanks a lot, George.

Thanks.

[Operator Instructions] Your next question comes from the line of Edward Kelly with Credit Suisse.

Hi. Good morning, guys. Nice quarter and, let me also say good luck to Bob. I'm sure you're going to be missed over there. George, could we just maybe start off with M&A and where you guys stand today in terms of the potential pipeline that's out there for you? It's been a little while I guess since you have done something more material in this front, but I know it is an important part of your story going forward. Just kind of thoughts on what's out there and how we should be thinking about it?

Yes. We have completed a couple small ones in the candy, snack and beverage arena. When it comes to performance food service, we're very active right now. We're comfortable that we're – that we've kind of got enough in the works that will get some successes coming up. We're obviously very careful with what we do and what we pay and the type of business that we buy. I think that M&A is important to us. I don't think it's necessarily an important part of our story, though. I think organically that we can move along just fine. That said, we are anxious to get some M&A done. We have people working hard. We're currently visiting people and we feel good.

Okay. And then a follow-up on Vistar, you mentioned bringing on some new dollar store business and retail is a good business there. Could you just maybe talk about the opportunity that you’ve got to grow Vistar in some of these higher margin channels and really kind of what you're seeing on that front?

Well, we like to continue to kind of take our offering and introduce that product into different channels. We’ve been quite successful there. Even our retail business, which I think everybody understands that retail has been quite slow, but we’ve been able to add more product to our offering. We're continuing to do more kind of health and beauty aid type products, anything that's impulse by. So that has helped us. We supply customers everywhere from a FedEx, UPS type of delivery model all the way to 52-foot trucks and we’ve put an automated pick and pack distribution in place, which we’ve been shipping now for just a few weeks that's in Mississippi, but basically in the Memphis area. That's going to be a big help for us in that smaller drop. We do fulfillment for other people where it comes from us, but it's on their invoice. That business we expect to continue to see grow. We just see opportunity in several areas. The hospitality has been a great opportunity for us. We can't really talk market share there because we're kind of creating the market as we get these hotels to put in pantries. Our core business, the theater area, the retail, the office coffee service, they all continue to grow and we see a bright future in that business.

And then, just last question for you. Can you maybe talk to what you're seeing in the industry from a competition standpoint whether that be pricing for the higher margin street business or competition for sales people for instance, which I know is important as well?

Yeah, I don't think we have seen any real change from the last time that question came up, which was last quarter. I think the market is still very competitive. Certainly when I talk to our people, we had a group of sales managers in last night from around the country and you listen to them and it's a very competitive marketplace. I think that our major competitors are – they're very focused and they do a good job and they're chasing business hard and we're chasing business hard and it’s just a matter of executing and getting it.

Great. Thank you.

Thank you.

Your next question comes from the line of Bob Summers with Macquarie.

Yes. Good morning, guys. Can we just talk about the independent business a little bit? I mean it's, obviously, it's been exhibiting strength. It seems that we're now close to maybe fully recovered from the damage the recession has done, but I guess the questions I have here or within that what kind of visibility do you get around new formation? And then, you know, as you think about the cyclicality of the business, casual dining versus independents, I mean what's the right way to think about it? Or are we sort of entering a new paradigm at this point where because the independent restaurants are better on trend in terms of consumer tastes, profiles, what they want that this relative growth could continue for a lot longer than maybe people think?

Well, I think one of the things that's really helped is the independent appears to have pretty good access to capital today. And I think that coming out of that great recession that it was very hard for somebody to get the capital unless they’ve got a very big check to open a restaurant. So I do think that's helped. I do think they are more on trend and they can move quicker. I think that it's an industry that it's hard to track the numbers. I think that – this is just my opinion and our people's opinion, I think the independent is probably doing a bit better than they're getting credit for when you look at numbers that get released. And I look at the big chains and I think they're working really hard. They are doing what they can do to appeal to a wider customer base and I think at some point some of them get traction today. I think at some point more of them will get traction, but it's just a changing and how people consuming and what they want to eat. And I think that just changes faster than it used to change. And today at least for now the independent just changes quicker.

Okay. And then just one housekeeping item, when you had - when you take a step back and you think about your three year plan and you had an acquisition number when they are not in there, I mean is, is the Red Lobster deal bigger than something that you had originally contemplated?

Yes. Bob, if you go back and you look at kind of the three year plan, we feared with analysts during the IPO standpoint that was all kind of an organic growth plan. There were no acquisitions built-in and at that time we were kind of assuming that Customized was going to be kind of - have the same rough customer base that it has right now. We thought we might get a fuel small wins in, but we didn't anticipate anything as large as Red Lobster, so yes this as little bit incremental too.

Yes. Because as we looked at our planning going forwards back then we really had a low expectation levels for our customized business and one thing about customers scale of Red Lobster for us that's a - you know to your point it's as big an acquisition of - on the M&A side. Obviously, when you buy something on the M&A side it's with you always Red Lobster, you know, we anticipate a good, long relationship with them and, you know, the culture - our culture and their cultures fit just really well together, so we're really excited about having them as part of the family.

Yes and I think we need to be a little careful here. I mean that when you say $500 million, that sounds like a very large number. I remember our cases and - as where our profit is and these are very expensive cases on the part of the seafood part of it. It's going to be a nice incremental increase for us in our customized and we will operate with extremely low gross margins, but it's not the impact of buying a company with $500 million in revenues. It's definitely not that kind of impact.

Okay. Thank you.

Your next question comes from the line of Andrew Wolf with BB&T Capital Market.

Thanks. Good morning. George, I was also going to ask you about the nature of the competitive environment and - but let me sort of look at it a differently, it looks like you and some of the other large players are doing good with local business. You’ve been for a long time and some of the other players more recently. What is it, do you have a sense if that implies that smaller players for structural reasons or any other reasons at least some of them are struggling and seating share, which often happens in many industries to larger players.

I think logic would tell me that either the growth of the independent business is understated or there has to be somebody that's losing that business. When I ask our people their opinion of where they're getting the business, they pretty much feel it's, you know, dependent on how the competitors do in that market. It's pretty evenly split. So, I don't think that our growth probably has any big impact on any individual competitor of ours, but obviously if the market is growing 1% to 2% and the big players are growing substantially better than that, then there's someone that's probably going backwards.

And one of the other things to call to your attention, Andy, is the fact that we say we're going to grow independent 6% to 10% in cases year-over-year and we're going to grow our brands 0.4% faster than that, you know, we have been growing brand substantially faster than cases and that's one of those things that the large broad line companies have a good brands portfolio and some of the smaller independents obviously don't [indiscernible] now scale to develop their own.

That's very true. That's very true. Even for us as he we get larger we find that we can do a deeper offering of our brand just by having the scale to pack it in a brand that we can really support.

Okay. That's really interesting actually. You know, how much runway do you have to continue to enhance the brand versus either industry best practices or internal goals and, you know, is it still multi-year penetration opportunity?

We believe so, yes. Part of it is just our brand will - you know, we’ll think just naturally be a little bit more successful than our case growth and we certainly have product areas where we don't have as complete an offering as our larger competitors do and as we get bigger we'll just continue to increase that offering.

Yes. Andy, our brands penetration in the Street business is in the low 40% of the business. You know, our largest competitor is closer to 50% and we have got some of our [indiscernible] right now that are well above 50% already so yes, we think there's a ton of runway.

[Operator Instructions] At this time there are no further questions. I will now turn the conference back to Michael Neese.

We would like to thank everyone for their participation on today's calling. Have a great day.

This concludes today's conference call. You may now disconnect.