Good day, and welcome to PFG's Fiscal Year Q3 2024 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Bill Marshall, Vice President, Investor Relations for PFG. Please go ahead, sir.

Thank you, and good morning. We're here with George Holm, PFG's CEO; and Patrick Hatcher, PFG's CFO. We issued a press release this morning regarding our 2024 fiscal third 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 in the same period in fiscal 2023. The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found in the back of the earnings release. As a reminder, in the fiscal first quarter of 2023, we updated our segment reporting metrics to adjusted EBITDA from the prior EBITDA metric. Our remarks on this call and in the earnings release contain forward-looking statements and projections of future results. Please review the cautionary forward-looking statements section in today's earnings release and our SEC filings for various factors that could cause our actual results to differ materially from our forward-looking statements and projections. Now, I'd like to turn the call over to George.

Thanks, Bill. Good morning, everyone, and thank you for joining our call today. This morning, I'd like to share our results from the fiscal third quarter, provide some color on the current business environment and discuss our plans for the fiscal fourth quarter and beyond. As you know, the calendar year began with a challenging weather in January, a choppy inflationary environment, calendar differences and early signs of consumer pressure. Nonetheless, I am proud of our organization and how we were able to achieve positive results despite these headwinds. In particular, our Foodservice business rebounded nicely in February and March, producing improved independent case growth and stable chain performance. Our convenience segment continued to experience difficult top line trends, though it has remained focused on winning new business and tight operating expense control, helping the bottom-line performance. We are encouraged by a sequential month-to-month improvement in C-store trends during the quarter. Vistar also experienced a more challenging top line in the fiscal third quarter after very strong growth in prior quarters. We continue to feel very good about how we are positioned in the market, which we believe will produce profitable long-term growth. We are optimistic about the fiscal fourth quarter and momentum into fiscal 2025, which is reflected in our guidance. Patrick will discuss our guidance in more detail shortly. Before turning to Patrick, I will provide color on our results, discuss our strategy and outline reasons for our optimism. Let's review some of the highlights from our most recent quarter and various factors impacting the results. Starting with Foodservice, segment net sales were up 1% in the fiscal third quarter with similar case volume growth in the period. However, if we walk through the 3 months of the quarter, it shows a very different picture. We started the…

Thank you, George, and good morning, everyone. As George mentioned, there are certainly headwinds to overcome in fiscal third quarter of 2024. However, our strong financial footing and market position produced a solid profit result that we expect to build from in the fiscal fourth quarter and into fiscal 2025. This morning, I will review a few highlights from our most recent quarter and spend most of my time discussing our financial position, priorities for the months ahead and provide some additional detail on 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 solid profit and cash flow results during the fiscal third quarter. This was possible because of our company's focus on driving sales into the most profitable channels and a disciplined focus on cost control while also continue to invest behind future growth initiatives. As we mentioned last quarter, we started the calendar year facing a difficult January due to bad weather throughout the month. This resulted in a slight case decline for our total business in the fiscal third quarter of 2024. PFG generated total net sales of about $13.9 billion or a 0.6% increase year-over-year. Trends improved in February to March, which allowed us to finish the quarter on solid footing. For the full third quarter, organic independent restaurant case growth was 4.3%, including nearly 6% growth in both February and March. We continue to gain market share in the independent restaurant channel across a broad range of geographies and concepts highlighting our favorable position in this important area of our business. Over the full 3-month period, chain restaurant cases were essentially flat, which we were very pleased with, given the impact of a tough…

[Operator Instructions]. We will take our first question from Mark Carden with UBS.

To start, you noted your market share growth accelerated relative to 2Q. And it sounds like you guys weathered some of the macro headwinds a bit better relative to the industry as a whole. Do any initiatives jump out at you in terms of driving the stronger relative performance just what, in your mind, what was most important in driving that improvement there?

Well, it would be definitely new accounts. We still have seen a difficult penetration market out there. It's the existing accounts as, I guess, in aggregate, just aren't doing the business that they were doing before. I would also note, too, with the quarter that if you took 2-year stack on our independent, it would have been a 13% growth. So we were north of 82 years ago and then 4.3% this year -- or last year and this year. But it's definitely new business that's driving our growth.

Okay. Great. That's helpful. And then -- just overall, have you seen much of a shift in distributor price competition just given some of the broader challenges that are in the industry have been calling out?

Well, I think that our industry has always been very competitive. There's a lot of players in it. And I think when growth is hard to come by, I think that you tend to get a market that's a little bit more competitive. But we really haven't seen that much of a change.

We'll take our next question from Jake Bartlett with Truist Securities.

Mine is on the environment out there. And you gave guidance for the third quarter after the weather in January. So presumably, that was kind of incorporated. So seems like the sales miss was more due to the environment, you talked about an improvement since. So I'm wondering whether the competitive -- or not competitive, whether the consumer environment has gotten any better? Is that driving any accelerating trends? Or is it just that your new customers and your pipeline and your actions are driving that improvement? Trying to get a sense as to the trajectory of the consumer right now and your customer business?

Well, the softness for the quarter is -- it's almost entirely a January story. January was really difficult. I would say if you looked at our customer base, QSR has definitely softened. It's a fairly large part of our business, definitely casual dining. I mean there's winners in both, but casual dining is very soft and we're finding the independent restaurant to be doing okay. I wouldn't say great, but I would say, okay, but there are many more of them than there were before. So it's the new accounts and our ability to continue to run in that 6%, 7% growth in new customers sold. But I don't see a really bad environment out there. I just think that we've got some stressed consumers that are probably at the lower income level.

Got it. Great. And my second question is on margins. You beat on margins a little bit in the third quarter? The question is, what was the driver of that? Was it the gross profits and the inflation being a little stronger than expected? Or was it about productivity improvements that helped in the third quarter. And I think as you -- Patrick, as you listed, I think the 3 drivers for improving a solid fourth quarter, improving productivity wasn't one of them. I'm wondering what the trajectory is there on just your operating costs, your leverage and how you -- what kind of progress you're making there in bringing down costs.

Yes. Well, as far as margin, particularly gross profit per case, that's a function of mix as we continue to grow at a faster rate and independent than we do the chain business. As far as productivity goes, I would assume you're speaking warehouse and delivery productivity or operational productivity. We continue to improve. We're not back to 2019 levels, but we do like the improvement that we're seeing. And then when you get to both our Convenience business and our customized business, they're really doing well from a productivity standpoint -- doing actually better than 2019 numbers.

And Jake, I was just going to add. I mean, it's a good point that we didn't call that out specifically as one of the things that are going to drive our Q4 results. But as George mentioned in his comments, we do expect operational efficiencies certainly in Convenience and all the businesses to continue to performance, they've been performing and to improve.

We'll take our next question from Edward Kelly with Wells Fargo.

I wanted to start with just Q4. And I guess maybe a bit more detail and level of confidence. So EBITDA is up 14% at the midpoint. Can you talk a little bit more about the bridge, Patrick, when you gave those few factors, I don't know if they were listed in order of magnitude, I'm curious about the size of any tobacco gain, for instance. And then within the guidance, do you really just need trends in April to hold? Or are you expecting any improvement in that regard? And as it relates to '25 with all this, I mean, if you do this number, I mean, doesn't this speak well about like how you're thinking about '25, particularly the first sort of 3 quarters of the year or are there other puts and takes to consider.

Yes. Thanks, Ed. I'll start, and I'm sure George will add some comments. I mean, to your last point on '25, let's just start there. I mean that's exactly right. We've mentioned in the call, like the guidance for '24 is really we're saying we're going to be close to the top end of our range on EBITDA, which is the bottom end of the range on the 3-year guide. So that puts us comfortable within that 3-year guide. So we do feel really good about where we're ending this year and then what that means for next year. And again, we'll give you much more detail in our August call. And then in terms of the things that I unpack and how we're going to hit these numbers, yes, I would say I wouldn't necessarily put them in terms of order of magnitude, I put it in terms of order of like P&L. I mean I really wanted to start with the fact that we have a lot of new business coming on -- and it's not just in one segment, but it's across all 3 segments. We've already onboarded a lot of the new Foodservice business in the last couple of weeks. We expect to onboard the Convenience business, a little later in May. And then Vistar has new business coming on in June. So really pleased with our sales development efforts across all the segments. And then it's really important, obviously, the fact that we've been looking at 2 quarters previously of deflation. And then in the third quarter, we saw that deflation in Foodservice move to very moderate inflation, but we've continued to see that modest improvement in inflation, and we continue to believe that that's what's going to happen for the rest of the quarter, which as we've noted, really helped in our GP per case. And also the mix of our business is really improving as well. And then finally, just the cigarette price increases. The way I think about that, it's largely in line with what we saw last year. So -- but we just called that out because it will help our bottom line as we get those inventory gains.

Yes. I'll add a few to that without getting too long-winded here, but he mentioned inventory gains. We overcame about $60 million last year of inventory gains that were above this year. And as we get into the fourth quarter, we don't have that to overcome anymore. So that's a positive for us. I would also say the calendar where we got benefit in fiscal second quarter with additional delivery day, which meant a lot at the end of the calendar quarter. And it affected January the opposite way. And then when you get to Q4, we started out with the week after Easter, which is typically our slowest week of Q4, yet we still had a good April, top and bottom line, and we don't have any calendar issues to deal with for the rest of the year. So that's very helpful. The new business has, Patrick mentioned, big help. Then last year, we were running close to 10% additional salespeople. So we're carrying a pretty good expense there. And we lapped that. We're up about 5.5% right now and salespeople were starting to get the good productivity out of the new ones. And we won't have that additional sales expense as we go through the fourth quarter that we've handled for most of the year. And I'll stress with Core-Mark, the additional business they're bringing on will also be a big help. So we have a lot of things that are going in a positive direction for us right now, and that's what gives us confidence for the fourth quarter and really into next year, which will give some good communication on our August call around what our guidance will be for first quarter of next year and then the total year.

Maybe I could just ask a quick follow-up. It's sort of related to this, I guess, but you're generating really good cash flow. Leverage is in a good spot. Your stock is probably trading at like 8x EBITDA and what you're probably going to end up earnings next year. I think you may end up M&A usually a bit higher than that, right? Like how are you thinking about appetite for stock buyback versus M&A at this point?

Yes, Ed. When we've talked about our capital allocation strategy, we've always said, #1 is to invest in capacity, and we've done a really good job, and we have a lot of new buildings or additional building expansions coming online, and you can see what we've done in terms of our investments there. And I'm just going to go through these and obviously reduce leverage is one of them, and we continue to perform well there. And the other 2 pieces are M&A, and we continue to look at opportunities. And then the share repurchase, we view as incredibly important, but as I mentioned, we didn't buy anything this quarter, but we still have $211 million in the repurchase program available to us. And we'll continue to use that in conjunction with all the other priorities I just laid out. So we just look at them very strategically and deploy that capital accordingly.

We'll take our next question from Alex Slagle with Jefferies.

Thanks for the color this morning. I just want to circle back on Jake's question a little bit, just the revenue drivers during the quarter across your different businesses. And like what's the biggest headwind that you experienced in February and March was that kind of kept a little on the top line? I mean it seemed like the independents and restaurants overall bounced back solidly and pricing firmed up. So it appeared to be more of a sluggish recovery in Vistar and Convenience cases and I guess the pricing was about as you expected, but perhaps you could flesh that out a bit more and what surprised you?

Yes. I would say in Foodservice that it wasn't so much the improvement that we had in February and March. We weren't exactly real pleased with how we did in February and March. It was just getting past January and we think we're going to continue to improve from a Foodservice standpoint. I think in Vistar and Convenience, the level of inflation that they dealt with was higher and lasted longer and I think there's an adjustment for their customer base when they go to a micro market or go to a vending machine or go into a Convenience store, there's been some pretty significant price increases. And I think they need to adjust. I think they will adjust and we are seeing same-store sales declines or what we look at as a penetration number. We were at 6.6% for the quarter for Convenience. It's huge. And it's not something that, that channel has experienced before. And I just think it's time. Our Foodservice is growing well there. That will help to alleviate some of that -- and I think the same with Vistar, it is the first time that we've ever had sales growth issues in Vistar, but they've got nice new business coming in. We just have a lot of confidence in that top line coming back. Now obviously, tobacco, it's not going to, that's going to be a continual decline, but we expect that.

Alex, I'll just add just on Vistar, just to give you a little bit more of a detailed example. I mean just us looking at this information, I mean when you think about Vistar and their business in theaters, the box office, revenue is down. It's only comping at 78% versus prior year and at 60% versus 2019. So there's a lot going in Vistar service is a lot of different channels. Some are performing really well, some are having some struggles like theaters. So it's a pretty mixed bag there.

That makes sense. And on Convenience, I mean, what was the case group? I think you talked about the food and Foodservice side was down. What did that look like if you included the Foodservice and, I guess, related to Convenience that was not in that category number?

Well, yes, Foodservice and the food area itself combined or down, but Foodservice was actually up. And I would say that if you took that with the Performance Foodservice, so I'm going to give you what I think because I didn't look at that specifically. But I would say it's probably mid-single digit. It's been doing well. And a matter of fact, last week, we set a record for the number of Convenience stores that we sold Foodservice to. We actually did with our pizza business and our Hispanic business, both actually had the most counts we've ever sold last week. That's encouraging.

We'll take our next question from Kelly Bania with BMO Capital.

I guess I just wanted to dive in a little bit more into the levers that you're able to pull on margins or expenses to support the bottom line that I guess I think some of -- or at least some of the new business wins were already in your plan and inflation seems to be, I think, playing out largely as expected. So just how are you able to kind of maintain the bottom line outlook despite the top line coming in where it is?

Yes. As far as the levers to be pulled. I think right now, with our -- in our Foodservice area, we've done a good job getting our margins up in both independent and national, we're pretty pleased right now. And I think most of what you'll see in gains from us will be just changes in mix of business. And as far as expenses, it took us a while to get our workforce back to where it was pre-COVID, and we just at this point, don't have any levers that we want to pull from an expense standpoint. We want to continue to build our warehouse and delivery crew and continue to build our sales force.

We'll take our next question from Lauren Silberman with Deutsche Bank.

Patrick, I just wanted to ask about the chain side of the business returning to flat. How much of this is a function of new business wins versus any signs of underlying improvement in chain traffic?

Well, I think I kind of mentioned that earlier, but it's worth talking about again. I think if you look at the chains, if you look at them in aggregate, it is definitely slow. Now we happen to have some that have been slow for a long time, but we have some that are doing real well. In aggregate, no, we don't see any strengthening in the chain business. You're going to see better numbers come from us in the chain business, but that's because of new accounts, not because of our existing account base.

Helpful. Another one on just Vistar. Can you expand on the competitive dynamics in that segment specifically and whether you're seeing any changes and it becoming a bit more promotional or competitive than you're used to?

Yes. Thanks, Lauren. It's obviously a very competitive environment because Vistar plays in so many different channels, they do have a lot of different competitions. As far as promotional, I mean, that's -- again, they do a lot of work with CPG. So most of the promotional activity is going to come from the manufacturer, if that's -- if I'm understanding your question correctly. But as far as how they go to market every day, they compete across the board in all their channels, I just want to make sure I answered your question.

Yes. I just don't know if there's anything from like other Foodservice distributor players in the space, if it's getting a bit more competitive in terms of share gains.

I would say yes, but I would say that's only in the theater category.

We'll take our next question from Jeffrey Bernstein with Barclays.

Two questions. The first one, just on the new business, George, I think you mentioned you're onboarding in all 3 segments, which seems quite encouraging. I'm just wondering if there's been any change in your strategy of late to achieve whether you're winning this business from your larger peers or smaller competitors, I think you mentioned independence, you're up 6% to 7%. I'm just wondering how sustainable that is. But just more broadly in terms of the onboarding in all 3 segments, how you're going about doing that, whether there's any changes you've implemented on your end to achieve?

Yes. Well, it's very different competitors that we've been able to get that business from because we have different competitor sets and the different businesses that we're in. I would say that there's no change in our strategy whatsoever. I think we're comfortable in that mid-single digit to higher as far as independent case growth goes. It's nicely a little bit of inflation to go along with it. And I think we'll always be opportunistic in the national account area. There's somebody that we're the right geographic fit for, and we feel that it's a good culture fit, and we can be profitable with it. We're always going to be looking for that type of business.

Understood. And then just on the mention of M&A and shareholder value creation, how are discussions with targets going? I'm wondering whether the slowing macro that you might be embarking on now for the industry, not necessarily for yourself, but for the industry, whether that helps or hurts in those discussions. Obviously, you have a big opportunity on the West Coast. Just wondering how that plays out in this type of environment versus others.

Yes. We're always very active from an M&A standpoint. We're always talking to several people. We try to make sure that we're talking to the people that are a really good fit and that we're not just spending time on something that isn't going to materialize. But it is a very important part of what we have gone on for our next fiscal year. And I think probably a big part of the next 3-year numbers that we put out when we get through this 3-year period we projected from our Investor Day. As far as the marketplace and how that affects it, I don't know that it really affects it that much. I mean the value is either there or it isn't. I think most of the M&A that we've been able to get done is more about it just being the right time for the person that's selling.

Understood. Just to clarify, so when you guys report your fiscal fourth quarter, is it likely that you will then give a 3-year forward outlook? So fiscal '25 would be the first year. And I think George, your comment was that M&A would play a bigger part over the next few years than perhaps it has over the past few.

Yes. We plan to have an Investor Day that would be 3 years after the last Investor Day and give 3-year numbers at that point. So what we'll be giving come August will be what we project versus our 3-year projection that we gave before. We'll tighten that number and then what our guidance would be for fiscal 2025.

We'll take our next question from John Heinbockel with Guggenheim.

George, I wanted to drill down on the sales force expansion, right? So maybe talk to that maturation. I don't know how many of those are coming off noncompetes, maybe you have a thought on that. And then is there a rule of thumb, right, when you think about the accounts that they used to call on, can they successfully move over a quarter, a third, 50%, I'm not sure what the number is of the accounts they used to call on. So your visibility into that? And then I guess the last piece of that is, I guess, it sounds like you think because of the sheer size of the sales force that you've onboarded that 6% to 7% independent case growth is even in this environment is very achievable.

Yes. Well, we have several that are -- and it's geographically widespread that are coming off noncompetes. But I'd tell you, we have every possibility that could happen with that. We have people that come to us and we put them in a different area because they'll compete. And when the year ends, they don't want to go back to where they were before because they're doing so well. We have people that don't do very well during that year, and we put them back into an area that they know and they do really well. And we have people that don't do well that year. We put them back where they were, and they don't do well there. So it really hits all over the board. We like to have kind of a good cadence of bringing people in so that we can train properly. And we brought a lot more in over a period of time as we were trying to catch up from pandemic times where we weren't hiring very many. And I would say that it was a success for us. I would say that we hired more people, so we had more people that didn't make it, but it didn't affect our turnover numbers. They've been very consistent for the last several years. So I think going into this Q4 with 5.5% more people will be good for us. I would hope that we get back up closer to that 6% or 7% number as we get into next fiscal year.

Okay. Maybe switching gears, right? So if you look at the onboarding of new business, right, you said all 3 segments are benefiting. How do you size the 3 versus each other? I know C stores can be more lumpy, is that the biggest of the 3? And then how would you assess the 3- to 5-year RFP outlook for C stores, right? Because I would think you should win a disproportionate amount of those that come up, right, given the Foodservice expertise.

We better. Yes. I would say Convenience is the bigger one for what we have coming in from a top line standpoint. But I would actually say that the Foodservice is bigger when you look at the amount of gross profit dollars it generates because it doesn't have that tobacco components. And I'll give you this number, the business that we brought in this month from a Foodservice standpoint. We'll add between 1.2% and 1.3% to our total Foodservice growth, that gives you a good feel.

That's just this month.

That's what we brought on this month, yes.

We'll take our next question from Andrew Wolf from CL King.

Just wanted to revisit there were some questions around the competitive environment in the industry and Foodservice. I want to kind of parse versus for getting new customers. First of all, in the chain side, in the last, maybe even 5 years, pricing and service, that kind of balance has gotten more rational. Has there been any change there looking for any changes in the competitive environment? Do you think that rationality is still in place, not just with you, I'm sure you are, but just in general in the market?

I think it's rational, yes.

And second, for independents, sometimes when things slow, the distributors start to increase the amount of incentive for switching and switching to lower the switching costs for the independents. How is that trending in year-over-year?

I would say it's trending higher. It's still not a significant part of the business, though.

Got it. And if I could put a third one, it's not, it's more internal in the industry. How are you seeing your competitors trying to hire away your salespeople? I mean, you said your turnover rates are stable. But just in terms of more activity, more conversations to make sure you keep your people and so.

Our -- we follow our turnover very closely. We follow what they do when they leave us and very, very few go to a competitor. Most either lead the industry or they may go into the manufacturing part of it or it may be a retirement. We look at our turnover, how it impacts the customer. So if somebody retires or is promoted, we do consider that to be turnover.

We'll go next to Brian Harbour with Morgan Stanley.

Yes. We've talked about this a bit, but maybe I'll kind of ask them more directly. In looking at kind of sales in the third and fourth quarter versus your expectation. I mean it seems like Vistar is the one that's seen probably more of a downshift and maybe that's still true in the fourth quarter relative to where you were. Is that kind of a fair characterization? And maybe you've seen the Foodservice side rebounding a little bit faster?

What you said is very accurate.

And also, this is a little more in the weeds, but just at the segment EBITDA level, you had some favorability in sort of the corporate side relative to last year. I know there was a little bit of M&A in that segment. I don't know if there was any sort of changes in the corporate cost base, but could you just elaborate on that a bit?

Yes. This is Patrick, Brian. Yes. So one, obviously, the 3 major segments, and as you pointed out, the EBITDA growth wasn't there. And again, that has a lot to do with January and the softness on the top line that we've already discussed with Vistar, but when it comes specifically the corporate -- all other segment, as you pointed out, there have been some acquisitions there. These are really small companies that bring some capability to the company. And in some cases, they're relatively new. So we haven't comped over their EBITDA. And then in addition to that, there has been some cost savings in the corporate, all other line as well. So that -- it's a combination of some of those smaller companies, some of the acquisitions and then all of those savings.

Some of that would be late-coming synergies that existed with Core-Mark and with Reinhart. We've been very slow around consolidating some of those functions.

[Operator Instructions]. We will take our final question from Peter Saleh with BTIG.

Great. And I appreciate all the color today. I did want to come back to the conversation around the overall environment, particularly in Foodservice. I think you mentioned QSR was definitely softer and casual dining very soft. So just in your opinion, ex weather and calendar shifts, is the environment really that much softer than it was in the prior quarter? Do you feel like this is really confined to that lower-income consumer? Or are you seeing any evidence that this is kind of migrating up the income stream to -- in terms of the softness?

Well, it's definitely softer than the prior quarter, particularly towards the end of that prior quarter. We saw some really, really good activity late in November and the month of December, which was ironic because our best time, and this was not just independent, but it was changed as well. It was just before the worst of times in early January. I think it's rebounded from there, but I would still say that the market is somewhat soft. I think it does lean more towards the lower end. We certainly see that in QSR. We have a couple QSR that play in the very high end of the QSR area, and they're doing quite well. It's -- casual dining suffered for years, and it continues -- I mean, this has been doing really well, but for the most part, a tough area.

Understood. And then just on the Foodservice inflation, I think that you're expecting some acceleration in that inflation in fourth quarter. Can you just help us what's driving that? Is that primarily cheese? I see cheese is kind of moved higher here in the month -- in April into May. Is that what's driving there? Or is there something else driving that inflation going forward?

Yes. We really over-index when it comes to cheese. So that would be the biggest part of it.

And there are no further questions at this time. I will turn the call back over to Bill Marshall for any closing remarks.

Thank you for joining our call today. If you have any follow-up questions, please contact us in Investor Relations.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.