Good day and welcome to the PFG Fiscal Year 2018 Q3 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, Investor Relations for PFG. Please go ahead, sir.

Thank you, Melisa, and good morning everyone. We are here this morning with George Holm, Performance Food Group's CEO; and Jim Hope, PFG's CFO. We issued a press release regarding our fiscal third quarter results this morning. The results discussed in this call will include GAAP results and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found at the back of the earnings release. You can find our earnings release at the Investor Relations section of our website at pfgc.com. Our remarks in 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 and our SEC filings for various factors that could cause our actual results to differ materially from forward-looking statements and projections. Now, I like to turn the call over to George.

Thanks, Michael. Good morning, everyone, and thank you for joining our call today. We are pleased with our third quarter net sales, profitability and strong free cash flow particularly given the multiple snow storms that occurred during the quarter. Total case volume of nearly 1% included a 4.8% increase in independent cases and independent sales growth to 7.6% as we've benefitted from our 2.1% inflation and 0.7% increase due to the mix of business. Net sales for the quarter grew 2.7% and excluding the customize Georgia facility closure net sales would have been 4.2% for the quarter and 7.2% on a year-to-date basis. Adjusted EBITDA increased 6.7% and adjusted EPS increased 25.9%. We have strong free cash flow during the quarter and a return on invested capital improved which Jim will be highlighting later in the call. Based on our results for the first nine months we remain on track to deliver our goals and objectives that we've set to accomplish earlier this year. Weather dominate the headlines of this quarter where we over indexed in our broad line distribution footprint as the bulk of our large distribution centers are on the east coast. However, we improved sequentially throughout the quarter and have experience singed as the solid recovery specifically in April where independent case growth was back over 6%. We did have a record sales week last week for both performance independent and performance full service as well as total PFG that was for the week ending May 5th we expect to top that with the week ending May 12th and Mother's Day. Performance Food Service top line growth for the quarter was nearly 5% while EBITDA growth was 4.5%. The increase in net sales was driven by an increase in selling price per case as the result of…

Thank you, George, and good morning, everyone. Let me take you through our third quarter financial results, including some detail on cash flow and return on invested capital. Net sales increased 2.7% over the prior year period of 4.3 billion, due to an increase in selling price per case as a result of inflation and mix. And we also experienced strong net sales in Vistar. Food cost inflation was approximately 2.1% for the quarter, driven by eggs, produce and meats. Gross profit dollars grew over 7%. Gross profit per case increased $0.26 while gross margin as a percentage of net sales was up 50 basis points over the prior year period to 12.8%. The gross profit increase was fueled by improved sales mix of customer channels and products primarily sold in the independent channel. Operating expenses grew 5% in the third quarter to 498.6 million. The increase was primarily due to acquired case volume than the resulting impact on variable expenses as well as higher fuel prices, acquisition integration costs within Vistar and accelerating increase in sales personnel within performance food service. Of the nearly 24 million increase in OpEx acquisitions represented approximately half of the increase so excluding acquisition costs OpEx would have increased approximately 2.5%. Operating profit was up 28.7% to 60.1 million driven by strong gross profit increased to 7.2%. Our adjusted EBITDA increased 6.7% to nearly $96 million which reflects the benefit of solid growth in Vistar, as well as continued strong control of corporate expenses. Net income for the third quarter of fiscal 2018 grew 62% to 33.7 million the growth was primarily a result of an increase in operating profit and a decrease in income tax expense partially offset by interest and other expenses. The decrease in income tax expense was primarily a result…

Thanks John. Before we get into Q&A we like to return to Vistar for just a couple of minutes. As most shareholders know, Vistar is the leading distributor of candy, snacks and specialty beverages and other single serve impulse and immediate consumption items, Vistar has a national distribution network with an unparalleled inventory variety. It also has the infrastructure to leverage specialized inventory to penetrate new customer channels. To support the growth in Vistar we have been opening new channels over the past few years, both organically and through M&A. Vistar continues to look at new opportunities for growth for consumers are buying candy, snacks and specialty beverages. Today, Vistar has strong market shares in vending, movie and office coffee channels. Most recently it acquired a new channel in the corrections phase, especially corrections commissary. We believe Vistar serves unique opportunity in the marketplace and has so much growth ahead, both organically and through strategic M&A. So, while today about two thirds of our overall profitability come from traditional broadline distribution. We believe Vistar is a very unique part of our business and that will increasingly contribute to our success over time. In closing, we are pleased with our year-to-date results, we remain on track to achieve our strategic and financial objectives for 2018. We're continuing to make strategic investments in our sales associates and our customer and associate facing technology. Our associates are determined to provide the best customer centric experience we believe we have the right strategies to deliver best in class and topline growth. We are investing in technology and more important, investing in our customers so they can thrive. We believe the M&A pipeline remains robust and we continue to look for potential acquisition opportunities in specialty, Vistar and performance foodservice with that were here to take your questions.

[Operator Instructions]. Your first question is from John Heinbockel with Guggenheim Securities.

Georgia you brought up Vistar where do you think the greatest opportunities are still today everything about where your share is the lowest. And on the retail side are you hindered, there certain accounts that you probably don't have because you don't distribute tobacco, how big of a hindrance is that.

Certainly, it would allow us to cast a wider net for customers and their places not having tobacco. It just makes it harder for us to sell them candy, snacks, and specialty beverage. That's a fairly significant part of their business and as far as they know where the opportunities are. It's real simple, it’s a good percentage of what an account relies on for revenues come from candy, snacks and beverages. We think we’re just in a good spot to be the person to deliver that. We have a large base, we’re extremely deep from the few perspectives in fairly small product categories. It just makes us probably a fairly difficult competitor in that area.

And then to switch gears the ramp-up in salesperson hiring. When do you expect that to start showing up in local case growth, to what degree -- I mean will be something that’s quite noticeable, I don’t know it can get you back to where you were a couple years ago, right, in real high single digits, but -- and then the people you’ve hired are they more productive in terms of what they can do per person then those you might have hired in the past or the profile of who you hired is pretty much the same?

Profile is very similar, probably a little less so in direct food service distribution experience, once again kind of cast a little wider net, we have hired at a faster rate than we have in the past as I mentioned in the last call, we did get behind, and as to when we’ll start seeing some benefit from that, we might have saw some in April, it’s kind of hard to tell, we were back over 6%, been a long time since we had not done that, although when we look at the fiscal third-quarter, we look at a two year stack, we were at 6.7. But if April is a reflection the first couple weeks in May can be difficult to tell because the holiday has such a huge impact. But I feel we’re starting to see some benefits in the hiring that we’ve done.

Our next question is from Edward Kelly from Wells Fargo.

Just a quick question and maybe it’s hard but from a total case proof perspective is it possible to size up the weather impact, I know you did it for independent, and then as we think about April performance and sort of like where you’re now, it sounds like your independent business has really bounced back, is that similar for organic case growth overall as well?

Yes, it is for overall. It was an interesting quarter because actually we got better sequentially each month, January was a very difficult month, March was actually a good month in spite of the [indiscernible] that hit four weeks in a row. We had tried to quantify the impact that it has had on the businesses outside of our independent, I think independent probably a little bit easier for us to do, it’s certainly infected us in Customized, although I would say that the Northeast is not as big for us as the southeast and when you go west the change that we supply aren't as big west. So, the impact in the Customized area, is kind of more midwinter impact than March, March was actually fairly good. Within Vistar we’ve certainly had an impact in Dallas stores and I think that’s similar to restaurants, people just couldn't get out and get into, the vending business actually tends to do quite well when the weather is bad, people don't leave the office as much, so it’s kind of hard to tell. I think when it comes to a restaurant occasion if people didn't go out, it’s not like they’re going to turn around and go out more often, coming up, so when it comes to something like the movie they're planning to go to movie and they didn't go because of the snowstorm, they’re still going to go see that movie, the movie they want to see, so we’ve so many variables that we deal with. I think it's probably the biggest impact was the independent, so if you take that 1.5, it probably goes down from there.

And just thinking about organic case growth overall, it looks like excluding weather sort of thinking year-to-date your kind of inline this 2% range, which is less than what we've seen historically. Low margin customize obviously is the headwind through it. So how should we be thinking about organic growth and your goals particularly as we look out beyond the fourth quarter?

We are pretty much state 3 to 5 and that's probably what we will continue to do and we've continued to do that if you exclude what we have experienced with customized and those are good customers but the quality of that sale is different for us from the margin component and the profitability component. So, a full 3 to 5 outside of that channel we are real comfortable that we can leverage that and put out the kind of earnings growth that is expected.

Okay, just last question for you is on freight. You didn't mention freight really this quarter and you didn’t last there but your peers did. I'm just wondering the impact that it's having on your business and it's still sort of like how are you managing you know the headwind better than some others?

I had Jim spend a lot of time on that so I'm going to go ahead and ask him to take that question.

So, freight maybe the headwind for us but it's certainly a manageable headwind. sequentially we are seeing and start to loosen up a bit from the year-over-year perspective and it's still but still an increase. I can tell you that internally our supply chain teams are working to manage as many inbound loads as we can which helps us and while there is a multitude of logistics challenges we are working our way through it, we think all of these will settle and we will continue to successfully manage through it like we have been, but it's a headwind.

Yes, and I'll add some color to that. Because you mentioned it may be different for our competitors. If you start first of all with our Vistar business I mentioned our big inventory very wide SKU base but we have heavy, heavy volumes with key suppliers that we buy only in truckload and to each distribution center and we have a truckload price from them and we don't have a FOB price from them. So, there is no opportunity for us to manage the freight and they manage it if their kind of cost that so we don't have a negative impact there. Then we get to our customized business and our whole strategy there has been for many years that we use as few distribution centers as possible for that customer and we land in truckloads as much of their product as we possibly can. So, it's somewhat the same situation where the continuity of our business is straight truckloads into these centers where we are ordering it from the manufacturer and they are delivering it to us either on their equipment or they are arranging the freight. Long answer but probably worth doing. We are in a different situation so it doesn't have a big impact on us.

The next question is from Karen Short with Barclays.

I guess at this late stage in the fourth quarter your guidance for the full-year, so is fairly wide range and obviously implies relatively wide range for the fourth quarter, so when I think if you can talk that.

Well I think that, we’ve only seen really one month of this fourth quarter and I think when you come off of some of the headwinds that we worked our way through, I would say that we’re confident in the higher end of our range, but we certainly don't want to give guidance that is something that we want to change. So, I guess it's quite simple.

Okay and then on Vistar you obviously great growth profit dollar growth but OpEx growth was significantly higher than where we’re looking for and I think you pointed to closing headquarters for CPSI at the end of June so that should abate, but is there anything else to look for in terms of mitigating that OpEx?

They had nine distribution centers. And there's only two that will continue to be open and long term there won’t be any that will be open so that will be helped and then I think that couple things and these aren’t major, but a couple of things. One is we certainly don't have the driver issues in Vistar that would have in performance foodservice is not as difficult job it's not as physical as job but there is still a driver shortage so you know we deal with some of transportation headwinds and we’re were handling those well. The other thing is that our growth continues to be in higher-margin channels that also have higher costs to serve so that tends to put us in a position where as we move along in Vistar, we should see higher gross margins and somewhat higher expense ratios and that’s the norm and we do business today that could change as we continue to look at other channels but for today we feel like we are going to continue to see margin improvement, and it could just be a little choppy as to where the expense ratios go.

Okay that’s helpful and then just last question on the M&A front, one of your competitors indicated that things will be a little slower this year, just in general, I am wondering if you could just comment on how you see the M&A environment and how we would think about M&A this year.

We feel like we’re in a good spot right now from M&A standpoint for reduction to be a better year than last year. Maybe not in number of deals but potentially in the revenue and EBITDA impact from those deals could be a little similar to CCSI were a lot of the benefit comes more so in year two than year one tends to be the way we like to look at it. We don’t touch a business very much in the first year. But we have activities that going on today in the Vistar world and in the specialty and that would probably be more where you will see it.

Your next question is from Andrew Wolf with Loop Capital Markets.

I assume the jump in independent case growth in April was all organic because it hasn’t announcing the recent acquisitions and also if you can confirm that, could you give us a sense of what the independent case growth was organically in the quarter or in April if you take out, if you gave a small acquisition helping out that division?

Yes, we haven't done any broad line acquisitions for quite a while, I mean well over a year. So basically, we have all the growth that we have is organic growth. I mean little bit but not material in any way.

So, you’re not rolling specialty into Performance Food when you calculate these numbers I guess.

We didn’t until we lapped, so we didn’t -- into the growth until we went through that 52-week period of time and our independent was where we had the sales histories in place and the reason that we did that is we moved some business around and we had some product that before that -- say that meat or the seafood company they were cutting it and delivering it themselves. And we started doing it on our own trust, and some of it vice versa so we just thought, let’s get through the 52 weeks where we are not given out regular number and organic number because it would have been confusing, so the numbers that we put out right now, the numbers that you get are organic, but they do have those three specialty companies in their once we’ve lapped the histories on them. [indiscernible]

And just a follow-up on Vistar, where is the [Memphis] facility at in terms of smooth operations sort of from picking, to packing to delivery and so forth, capacity utilization, how is that ramping, how are those processes ramping, I know you’ve some...?

Right it’s going very well, we have excess capacity there, which is always a nice thing to have, its continuing to grow, we’re being fairly conservative with it. We are in the process now of looking at number two and we’re doing a lot of work around what the difference will be between the current one and the second one where we could get to a level of profitability and the right productivity quicker and we’ll be talking more about that, particularly as we get into our next call. But as far as the current facility no issues, nothing to talk about there.

Your next question is from Vincent Sinisi with Morgan Stanley.

I wanted to -- you’ve been the last few months certainly talking more about Vistar which is great obviously differentiated part of your business so wanted to just put the first question back on that, when you looked at obviously like the word vending and it comes to a lot of different customers that you’ve lot of different parts of the business kind of where do you think right now you’re kind of -- you’ve the best share but where do you think you’re most underpenetrated and should we think of it as essentially like endless opportunities for you and especially since there is no other large player in that space?

[Bending] has not been but I would call there are growth channels are many-many years actually it was negative for several years and we've been always able to grow just by taking share. it's kind of hard to even to determine growth there. I think the channel is growing but it's growing because of micro markets and micro kitchens. We are seeing very nice growth and we are seeing nice growth in every single channel that Vistar has been, but I think and this is just only I think that a very high it's not just about all of our growth is coming from micro markets and micro kitchens within vending. And remember we are selling the bend operator so we only have certain amount of insight into whether that product ends up in a machine or ends up in a micro market environment or ends up in a micro kitchen environment. Our shares are comparable so our handles that were with the exception of the corrections commentary business where we have actually a quite low share so we have a lot of potential there.

Okay so that's most underpenetrated than and do you I mean I know no kind of forecast out there but do you to your comment earlier George about kind of becoming more and more of a contribution to this business. If you look out 10 years, should we expect it to be a meaningfully higher part of the business, when you're looking at both the core sales and profitability?

I think you could see that in the potentially in the next year or two but I believe Performance Food service is what's going to provide us with best growth in probably both sales and EBITDA.

And then maybe just for the follow-up just more of a housekeeping, just on the full year tax rate I believe you said last quarter that you are expecting 33% for the full year is that still the case.

That's right. It's still the case.

Your next question is from Kelly Bania with BMO Capital.

Just wanted to maybe talk a little bit more about gross margin that continues to come in at least ahead of our expectations so you called out the growth of $0.26 per case and obviously that margin expanded 50 basis points and there is clearly some improved mix with the business but maybe you can just help us understand is there any impact there from the customize and the closure of the facility there and maybe should we start to see that settle back down over the next couple quarters or just how you feel about that the drivers of that gross margin?

I think it's a little bit complicated on that over complicated. I think if you take and if you look at Georgia closure that low gross margin business and if you look at the decline in sales and customize it's our lowest gross margin. so that contributed to 50 basis point increase in margin. Also, when we get into the Vistar business it is the higher margin but I also mentioned higher processor but it's the higher margin business that is growing at the fastest rate and in Performance Food service today we've continue to grow our independent at a faster rate than we have grown our chain business. What I expect to see as we get into next fiscal year would be the margin probably continuing to improve, but they are not going to improve at the rate that they are improving today but we also with better growth expect to be able to leverage it better. So, I think that as we get into next year on what I am looking at is better gross margins than we have today, but not the kind of improvement that we've been running and a little better effort around cost control, particularly with some of this overhead going away from CCSI hopefully that helps.

That makes sense thank you. Just one as follow up to on the status of market watch and how that rolled out to the sales organization and you saw up implementation of that tool.

It is fully implemented as of the end of March, I think it’s difficult to tell, but it has helped their margins and I really wouldn't be comfortable to say how much I mean, our independent margins have improved not dramatically, but they've improved and I would think that we could attribute it to our people having more knowledge than they had in the past and that’s probably about all I can really say with it. It's still new and we’re just now fully implemented.

The one comment I would add is our margins are doing well in a period of inflation and that’s important to note. So, I think market watches given the sales people information they need to understand what the right price.

[Operator Instructions] And your next question is from Ajay Jain with Pivotal Research Group.

I want to ask if you can quantify the improvement in customized and in the PSS segment in the current quarter George, I think you mentioned some sequential improvement for April, but are you back at what you would consider to be a more normalized level in terms of case growth and I'm asking for both independents and in your multiunit business and by normalize what I'm really if you think you’re back to the level that you’re contemplating a few months ago I think back in February you were expecting to be at the higher end of the EBITDA range for the year, so just wondering if theirs is been you’re back to what more normalized level.

While for the month of April and the first two weeks of May, I can say were pretty normalize when it comes to independent growth but its six weeks, so that’s not a long period of time to establish that but we feel real good with it. Customized we roll off the histories after this quarter of the Georgia closure and we had one other account where we had a bankruptcy that we got sales histories for so that should it should normalized within what the norm is in that business and that a fairly slow casual dining environment. Now I will say that it is better than it has been in the past we’re really encouraged by what we see particularly out of a couple of customers and real true improvement in same-store sales growth. So, if that continues, that would be great. I don't know that how that area does -- it’s going to have a real material impact on what our EBITDA growth is as a company, but today we feel real good around performance foodservice, we’ve invested heavily in salespeople. We said we would do that with questions around what we would do with the tax savings. We did a great job there and our Vistar, business, we just have a lot of confidence around next year in both sales growth and then kind of a little better expense level then we had in this year.

With respect to Vistar…

And we’ll be giving guidance by the way on our August call, so we’ll do a whole lot of work around that and give the best guidance that we can give.

Just one final question with respect Vistar is there any way to give a breakdown of like the segment performance without the benefit of acquisitions, so I am just wondering about the organic growth trends both top line and EBITDA for Q3?

It’s very hard to do, because when we make acquisitions we merge business in pretty quick, nobody has the footprint that we have with the national footprint so we’ll make an acquisition, we did a small one in January and we had customers who went into five different distribution centers, so -- and many of the customers we have already sold something to, so it’s very hard even in the case of CCSI when we got to October we saw the projections on Star Wars for December and made the decision that we weren't going to be able to do the job as good as we should do from a service standpoint, if we kept that business in, so we moved a lot of that, it's real hard, but if you just look at what the top line was of these acquisitions that we made and what our top line is now, so more directionally we’re still running -- at worst, mid-single-digit organic growth and from a case standpoint.

And your final question is from Judaj Frommer with Credit Suisse.

First maybe just higher level on independents, if you kind of exclude the weather, maybe look at the last six weeks or so, what are you seeing just from a health of the underlying customer and maybe some color on penetration of existing customers versus new business and how the churn is in that business, do you have plenty of new openings offsetting closings there?

Yes, I don’t think a lot of changed since the last call, I think the independent channel is still doing well and then when you start to dig into how it looks from our numbers, I think we’ve always got a number that we’ve like a 5% to 6% and a lot of the country we don’t cover from the full broad line aspect but what we’re seeing is that we’re still pretty dependent on new accounts, we grow our new business at a faster rate than we lose business and then if you get into the penetration that we have, we’re doing well, but we’re growing our lines faster than our cases, which tells expense probably they’re buying less cases of what they bought the previous year or I mean I guess you could say maybe we already had the high case movement items and are penetrations are coming further down the tail movement. So not sure there but all in all, excluding weather I think that the independent channel was good in the quarter and I think it continues to be a tailwind for us.

And then just one follow-up maybe on inflation you called out a few categories in PPI that are just maybe it sounded back the way attract but it doesn’t look fall that grade as far as you can see inflation kind of continues in that 2% range that you are thinking about is there anything besides the categories you called out that may be helping there?

We don’t know first of all of course, but that being said, we don’t see anything that should drive the big change or make things different then they are to do today. So, given the marketplace I would think we are looking at 2% to 2.5% inflation going forward.

I would now turn the call back to management for closing remarks.

Thank you for your time this morning. We are hosting a Cagney luncheon tomorrow in New York City at [Indiscernible] at 12:00 O' Clock. To register for the event please visit consumeranalystgroupny.com and select monthly [lunchables] tab you'll be directed to the membership portal where you can sign-up as either a member or a non-member. And we hope you can make it. Thank you for your time today.

This does conclude today's conference call. You may now disconnect.