Performance Food Group Company (PFGC) Earnings Call Transcript & Summary

Good morning, everyone. My name is Jeff Bernstein, and I am the restaurant and foodservice distribution analyst here at Barclays. I am thrilled to introduce our next presenting company, Performance Food Group. With us this morning from Richmond, Virginia, we have George Holm, Chairman, President and CEO; Jim Hope, EVP and CFO; and fly-on-the-wall behind the scenes, Bill Marshall, VP of Investor Relations. By way of background, for those not familiar, Performance Food Group is a leader in the U.S. foodservice distribution industry, supplying over 200,000 locations from over 100 distribution centers. In fiscal '20, Performance Food Group generated revenues of $17 billion in the Foodservice and $8 billion in the Vistar segment. The Foodservice even then still not fully representative of the Reinhart acquisition. But with that as a little bit of background, we've opted to do a full fireside chat Q&A for the 35 to 40 minutes we have with you this morning.

So with that said, I will kick it off. We did have 2 of your peers doing fireside chats yesterday. And I think everyone's kind of talking about just the concern that everyone is facing in restaurant and foodservice with the recent spike in infection from a COVID pandemic perspective. Not looking for any quarter-to-date updates, but I'm wondering whether there's anything you can share in terms of kind of directional trends or whether you were anticipating a spike or if you were, to this magnitude, I know a couple of your peers mentioned yesterday that maybe trends slowed a little bit through November, but again, I leave it to you to offer up as much color as you'd like to in terms of just the impact from the recent spike in cases.

Yes. We slowed a little bit in our independent business, still single-digit declines, and then total business about the same, as September, same as October as far as -- versus the previous year.

Now that's encouraging. It seems like everyone's talking the same thing about how a spike would be hard to totally ignore in terms of the impact it has when certain regions have literally closed their restaurants. But with that said, as we think about the Foodservice Distribution segment, I think most people talk to us as if it's more of an ongoing roll-up type story, the big 3 still having a relatively smaller market share compared to maybe other industries. Just maybe you can provide some color in terms of where you expect your market share trend over the next number of years and whether specific acquisition, whether -- what you're looking for and maybe are there any inhibitors to that.

Yes. Well, we feel we've gained share going through the COVID, and the information that we get says that. We seem to have gained more share where we already had good share as far as channels go. But within the independent restaurants, we've gained share in every restaurant type. So we're real pleased from that standpoint. From an M&A, first of all, our last one, Reinhart is going really well. We're very pleased with how they've done. I think it's hard right now to get out there and be acquisitive. Everybody's business is soft. It's hard to use numbers from a normal environment. It's kind of risky to do that, to price it from that. And then if you just try to price the value of a business based on the business they're doing now, they're probably not going to sell the business. So I think we're at a little bit of a standstill until we get into a more normalized environment.

Right. Interesting because I know yourselves and your largest competitors talk about gaining market share. We also periodically will talk to kind of that next tier of the next 10 or so foodservice distributors who also say, "Don't be fooled the way we are taking market share." I know it's hard to -- you guys get to see more numbers than we do. But who's presumably the loser in this? Are there just small distributors that you see who are severely challenged and going under or losing significant accounts? Or how would otherwise everyone be gaining market share?

Yes. I mean, I wonder the same thing. We have limited information that we get, but the information we get, we feel, is accurate. Just the fact that we're running low to mid single-digit declines in independent, that tells us a good bit right there. As far as who the losers are, I really wouldn't know. I don't think there's any 1 competitor or 2 competitors that we're getting more of our business from.

Well, is there any? I mean, whether I'm talking to a restaurant operator and they talk about kind of the smaller restaurants or if I'm talking to a large distributor, and they talk about the smaller distributors. Clearly, the smaller players would appear to be more challenged, just lacking the technology and perhaps some of the innovation opportunities. Are you seeing any closures that will present market share opportunity, whether of significance in the restaurant space or of some of your smaller distributors? Or surprisingly, are most of these fighting through and performing better than you would have thought?

I think all industries are doing better than people would have thought. When it comes to the restaurant area, there's obviously been significant closures, but nowhere near what was predicted. There are certainly some chains that have been heavier hit, particularly those that don't have drive-throughs and aren't set up to do good takeout and delivery business. And then when you get to smaller foodservice distributors, when your business is down, your receivables are down, your inventory is down, it tends to generate some cash. And I think the real defining time is going to be when that vaccine gets pretty widely distributed and people get comfortable to go back out to eat, and business comes back up, and people have to -- they've got to put that inventory back in place. The receivables are going to go up, and I think that's going to be more of the challenge.

Yes. Right. Now as we look ahead, if we were to flash forward 12 months, and if we're sitting here today looking back, just from your perspective, what do you think investors and restaurant operators and distributors are going to say has been the most significant change that may be stuck through the pandemic versus maybe other initiatives or factors that maybe faded? I'm just wondering, as you look 12 months ahead, what you think will be the most defining structural changes in the industry?

Take out and delivery. I know personally, I've done a lot of it, something I didn't use to do very much. I've always felt the model for third-party delivery really wasn't very good. Everybody was having trouble making money, be it the restaurant or be it he third-party delivery person. But it seems to be pretty ingrained right now, and I think that's a wildcard, how that comes back and how those companies do. But I think takeout is going to continue to be an important part of the business. And we've been running 20-plus percent increases in disposable sales, and it's take out. I mean, that's what's driving.

In terms of how you run your own foodservice distribution business, has there been any changes that you've implemented through this crisis that you say, you know what, coming out of this, this is a better way to run our business, and we're going to kind of continue pursuing these initiatives?

Well, leaner, I think that we'll be a leaner business as we come out of this and have lower expense ratios as we come out of this. We, right now, have our average salesperson does more business than they did before the drop-off in business. And I think we know that we can get better productivity from our salespeople, and it's expense ratio. So I think that's going to be the biggest sell-through obviously.

And then if we think about future profitability, a lot of your peers, whether it be foodservice distribution or customers being the restaurants, they're all talking about doing more with less. And perhaps when sales ultimately recover to full strength, there's upside to whether it be the restaurant margin or the EBITDA margin. Just wondering whether you see that, that is a likely scenario for you guys and the potential magnitude or biggest areas of opportunity to see being doing more with less idea?

Well, when this first hit, we spent a good bit of time trying to get our business sized as best we could for the amount of business we had. But we pretty quickly focused to try and to grow our business into what our expenses were. We were not going to dial the business all the way down, and I think that's helped us. I think we're in good shape with it. We're not certainly going to give a number as to what we think the expenses that we were able to get out of the business will be long term because we're in a different environment. We want to be ready when business comes back. And we have close to half of our foodservice OpCos are running more business than the previous year today. So we just want to be ready. That's the biggest priority.

Yes. Right, and I know you guys are a fiscal June company, but if we were to think about just on a calendar year basis, only 29 days left of 2020, which I know a lot of you are counting down with great excitement. But as we think about calendar '21, and maybe this is more of a question for Jim, but just directionally, how should we think about your business as we lap the tremendous challenges of 2020? Maybe the biggest puts and takes. Obviously, we start the calendar year, business was pretty normal, and we saw huge declines, pretty rapid recovery. So how do you think about it if you were kind of thinking about your financial performance with a clean slate? How do you think about the lapse of such unusual volatility that we watch throughout 2020?

Well, I think George touched on some of the really important things. One of the most important variables will be how does the vaccine play into the recovery of the economy in our business. As you know, we've got a 53-week fiscal year this year. And then as you also know, we'll wrap on the Reinhart acquisition at the start of January. So those are a few important items that impact how things will look. Aside from that, I would only say that I'm encouraged about how our people have responded. I'm encouraged by the resilience of our customer base and how so many of them have thought through this and handled things so well. So I think I'll leave it at that without providing any more of an outlook.

Yes. Got it. When I think about the customer opportunity, I think most of my peers and a lot of investors think of growth in terms of adding new accounts or acquiring distributors. I often think that the greater opportunity is the share of wallet with your existing customers. So I'm wondering if maybe you could provide some context in terms of what your current penetration is with your existing customers. I think it's quite different between independents versus chains, so maybe what type of penetration you have with whatever bucket you wanted to define and where that potentially could go because it seems like a lot of people are talking about maybe focusing on fewer distributors to do more of their business. So just trying to get a frame of reference for where you are and where you could be.

Yes. Well, penetration, obviously, is the most profitable new business that you can get, penetration in an existing account. And it's been an interesting time as we've gone through the slowness. We've increased our SKUs per customer and had only slight declines per customer several weeks where we've actually have increases. And our number of customers is down from the previous year, mid-single digits, so not huge. Our challenge is probably the same as everybody else, but to hold on to what business that picked up during that period of time, and then to make sure that the people that have been closed or the people's business has been really negatively affected that we could get our position back within that customer and continue to be the key provider. But I think everybody in our business has all kinds of opportunity within their existing customers.

I didn't have much of a guess ahead of talking to you and your peers, but it sounds like with independents, I'm assuming they want to be dealing with a few distributors to have some diversification. So is it reasonable to assume that you have 20%, 30%, 40% kind of mix of independent customers? Or would you say that you have higher or lower than something like that?

You mean as a percentage of their purchases.

Yes.

I think it depends on the type of customer. I mean, we have channels where we have a very dominant position with the accounts. And then we have certain types of restaurants where we're almost always the backup distributor or maybe even the third one. So they really, really varies. It depends on if our company is broadline or if it's kind of a legacy specialty company. It varies tremendously.

But does that number go up meaningfully if we're talking about the larger the customer? Does it -- they tend to focus on fewer and fewer distributors directionally?

Well, certainly, a chain. I mean, the chain is going to be often 100% with one person or maybe they'll have a produce distributor or something like that. A large independent, I think, is where they're going to have the most number of distributors.

Right. And you mentioned that your -- the customers that you serve are maybe down mid-single digits. I don't know if that's the proxy to use because you do service so many accounts. When people talk about what type of industry closures have we seen, I know earlier, you said it's been a lot. I guess, it depends on how you define mid-single digit, but is that your best guess for what you think the overall restaurant industry has seen in terms of closures, mid-single-digit percentage decline?

No, I would not say that. I would say that it's probably close to double digit. And when I say mid-single-digit, it's because we've also picked up new accounts that we didn't have going into that period of time. And it's very, very regional. New York City, large declines. Really, the Northeast, pretty good declines. Chicago is tough. West Coast is tough. Minneapolis, that area, lot of closures.

Yes. Right. You mentioned the Reinhart acquisition. I think we're now approaching the 1-year anniversary there. Can you give us any update in terms of the progress of the integration, maybe where we stand on the cost synergies? And as you kind of digest that, any major learnings from this acquisition that would potentially help on future such acquisitions?

Well, we gave a $50 million number for synergies, and we're very comfortable with that at this point. It's moved along well, and it's as we expected. Reinhart is a very well-run company. Many strengths that we don't have, particularly kind of some of the front office things that they do, the shared service is really good. From an IT standpoint, they're quite strong. And all those things have proven to be the case. And what we really needed to do was just get the company in a position where they were growing their sales and growing their margin. And they've improved, I mean, really tremendously in both those areas. So we couldn't feel better about Reinhart than we do today.

And in terms of -- I'm assuming within each type of acquisition, there are some learnings. You said there are some things that they do that they run their business really well. What can you kind of take? Presumably, you're in the best position to kind of take some learnings from acquisitions and bring them into your own business. Is there any examples of things like that?

Their shared service center. They've been doing it for a long time. They do a real good job with it. They had a sales force where they had some really tenured people that were excellent, and a lot of new people and not much in between. So as we've been able to take that turnover down, we've seen some good results as we expected to. They did a much better job with their brands than we had expected, so we've held on to a lot of the brands that they have. Some of our, what we consider to be our more important are higher profile, kind of higher-margin brands, they've adopted, and they're doing very well with that. So it's just -- it's been a real good mix, putting those 2 together.

You mentioned brands. I know people often think about in the foodservice distribution industry, the best way to improve your margin is either deal more with independents or to sell more of your own products versus national brands. Any color you can share in terms of kind of where that mix was of Performance branded products and kind of where that could go and maybe what the margin differential is versus a national competitive brand?

Well, we're very close to 50% are independent of our business is our brand. We have several that are over 50. We have some that are over 60. So we think we've got a good runway there. When you get outside of the independent customer, we sell really very close to none of our brands because our nonindependent business is chain restaurant business. We do very little lodging or contract feeding or that type of business. And we just don't see a reason that we can't get up above 50%, but it's focus. And if the customer wants a national brand. We're certainly going to try to be first in line to get it to them. But we have a lot of focus on the brands, and we feel real good about the future of our brands.

Jeff and George, one thing I'd add about the Reinhart acquisition integration is the cultural fit was exceptional, and that's where successful acquisitions can really start. Their willingness, that group's willingness to adopt things that our organization did well was really high, and their willingness to share best practices with us was really high, and the cooperation was exceptional. So it really is looking more like one big company as opposed to the Reinhart acquisition working into PFG. And in that process, we've really developed a strong approach to M&A integration that is going to serve us well.

Yes. And their leadership at the distribution center, what we call OpCo, 100% the same people as when we closed on the acquisition and the person they report to, that person is same. I mean, we've had no turnover at the next level up either. And really, where we've had some turnover is where we had redundancies at the corporate office. So I think that consistency has really helped us.

George, you mentioned that with some of your accounts, you could be well north of 50% of the product being sold, being private label. Directionally, the magnitude of margin benefit that, that would generate, obviously, I know that they want a national brand, you go with the national brand, but is it double the margin versus a national brand if you're able to sell your own product? Or how should we kind of think about the relative magnitude of that?

Well, we don't -- it varies so much depending on the type of product and depending on the mix of the OpCo. But I think I could give 50% as a range better through the margin standpoint.

Okay. I think recently, you noted seeing relative strength across every type of restaurant and maybe increasing your SKU count, as you mentioned earlier, per customer. Just wondering maybe walk through some of the major drivers of that outsized strength as well as maybe the cuisine types you think that have perhaps put you in a better position. I know a lot of people talk about the pizza category, but maybe just more broadly in terms of kind of the major drivers of what you think that outside strength has been.

Well, we've always had pizza as part of our core going all the way back to 2005 when we did the Roma acquisition. And even if you go back to 2002, the foodservice part of what was then Multifoods Distribution Group was almost entirely a piece of this, and so that's always been an important part of what we do. So we stayed very focused on that going through this period of time, Hispanic, barbecue, the type of items that people typically either don't know how to make at home, don't have the right equipment to make it at home, and we thought that those type of places would do well. In many instances, they've actually flourished, they've actually did done better than they did before. Matter of fact, we have some that just, even though the restrictions don't stop them from having indoor dining, they have so much volume and takeout, they never open their doors.

Yes. And maybe just curious to get your thoughts. I know you mentioned you've really had no turnover, so kind of Reinhart is operating as it was. And then you got their lead person kind of reporting into someone on your team, which seems like that's a different structure of maybe how you operate when you bring in certain businesses versus some of your peers. I'm just wondering why you think that approach is the best approach versus more of kind of blending them all in and bringing them all from a regionalization perspective.

Well, it is a different company, and it's still a different company today. The brands don't match up entirely. Actually, we've got a long way to go for the brands to match up, but we're pleased with what they do from a branding standpoint. And when you start changing items with customers, unfortunately, you start changing customers, so we're being really careful as we do that. Now we know there's synergies available by reducing the geography of what today Performance Foodservice Company would cover and the Reinhart Company would cover, and we'll eventually get to that. But the risks are too great to do that right now. We have to get the product handled first, and we have to make sure that other than geography that we have these 2 companies really operating as one. We're getting close to that.

As we think about the Vistar segment, just kind of shifting gears a little, maybe you could walk through some of the major categories within that segment, maybe how those business lines have trended recently and how you're ultimately thinking about their recovery and potential for accelerated growth over time.

Well, our convenience business has done well, top line and particularly well on the bottom line, so that's been a big help. Corrections is going fine. Our value store, dollar store type business, is doing well. And all other businesses that we're in, in Vistar, really are dependent on people getting together in groups, people who are on the work and people traveling. And people aren't doing any of those 3 things. So we have some parts of our business that are struggling. Certainly, theater. Vending is on a slow, but steady -- it's getting back there. I mean, it's pretty heavy blue-collar business, and those people have to be at work to get their work done. Office coffee service, slow come back, very slow comeback. And then the airports, I mean, we do a lot of business in the airports, and they're slow to come back. So Vistar is still a profitable business for us, in spite of experiencing large sales declines. Very well run business, has been our flagship actually from a return on sales, return on capital standpoint, and we expected to get back to that. But we've dialed the business down, but we still have certainly more expense than we need for the sized company it is today. We're going to sit there, and we're going to watch the business come back and that's going to be a very good business for us. Fortunately, our Foodservice business is doing well enough to where it's really made up for that.

And because you have so many different interesting lines of business within Vistar, are there any of those businesses or segments that you'd say have been permanently damaged by this? Or are you confident that all business lines, even the ones that are the most challenged today, would get back to full strength? Or might there be categories that you say, "You know what? Maybe we need to get out of because I don't think this business is ever going to get back to what it was?"

Yes. I don't see anything that we would exit as far as the channel goes. I think that we're core to the success of those channels. And we're going to be around, and our customers will be around.

And the -- we've had a couple of companies yesterday talk about how we'll get through the winter months, do what the best they can. And then once we get into the spring, warmer weather, vaccine, you could see a tremendous burst of strength in the industry and the economy more broadly. Big picture, wondering whether you'd agree with something like that. And then just more broadly, how do you think about inventory when people talk about all of a sudden a big spike? I mean, are you carrying enough inventory to ensure that level of supply? Or what have you learned kind of from the initial COVID spike that leads you to manage your business today better?

Well, with the original spike, we made sure that we received every order that we were shipped. And I think in the end, that helped us. We did have to go to freezer product, but that frozen product became actually quite valuable. And I think it's really important that we're ready to go when things come back. And we're not in the business of reducing our SKUs. We're -- we want to continue to be aggressive.

Right. In terms of, I guess, people compare and contrast the distributors based on EBITDA margin, maybe just talk a little bit about the core pillars of your margin. It seems like it's not as strong as other larger maybe distributors. I'm wondering how much of the differential is the businesses you pursue versus maybe just a certain scale advantages that as you get larger from a top line perspective, maybe the margin differential would narrow. How you kind of think about where your EBITDA margins are today versus competitive set and where they could be?

Well, certainly, most of the margin difference is just the different channels that we're in. I mean, we have some very low-margin channels because, in many instances, because the case cost is so high and the drops are very high. It's also why we have such low expense ratios compared to our competitors. If you get into the core Foodservice business, I think we have some improvement to do. I think that some of it, to a degree, is structural. We learned a lot purchasing Reinhart with that. I mean, we can go further down the tail of movement impact product in our brand where the margins are better than they could. And our 2 bigger competitors can go further down that tail of movement than we can because they have more volume. Our volume is in real specific channels where we're very large. And there, we have extremely deep product lines within our brand. We have a lot of duplication. We have a lot of different quality levels. We're unable to do that in some product areas. So I think the ability to purchase is we definitely have some upside there. I think that our competitors have an advantages over us there. In many respects, we go more miles. If you look at our Foodservice business, and you go East of the Mississippi, you've taken in about every broadline company that we have. We have a few in Texas. We have one on the West Coast, and that's where we have the kind of purchasing power that you need to be a true broadline distributor. So I think that affects us. We have a very high case cost, average or significant, in some product lines where we run really good gross profit per case. It doesn't really cost any more to move those cases, but they're very high dollar products, so that has some impact. So I think there's a lot of reasons, but when you get down to the end of those reasons, for us, provided our mix of business continues to get better, you'll see better EBITDA margins from us.

Right. And as we think about -- I think early in the crisis, there was a question as just about survival and liquidity. And clearly, we've moved well past that, and you and others have done a great job of kind of solidifying the balance sheet. So maybe just thinking about the working capital build and free cash flow in the near term, Jim, any color in terms of how that -- your thought process on that and, longer term, whether there's any capital usage restrictions from a debt covenant standpoint that we should be focused on?

We have a very good position and a very strong balance sheet and an excellent capital structure, and I feel very confident in our liquidity. I'm really pleased with the work that the organization did around managing liquidity, not only working capital, but financing as well. So I think that's positioned us in the near and the mid and the long term to be in a very good place from a balance sheet perspective and liquidity perspective as we move through this pandemic and the eventual recovery. I do believe, and we've talked about it before, that as sales volume continues to recover, we'll build working capital, and all the things that come along with that will happen. At the same time, I've seen the organization pay very close attention to how we've allocated capital and how we've used working capital in general. So I think we have the right disciplines in place, the right key metrics to follow and a very experienced organization that knows how to manage the growth as we return to that.

I think when it comes to capital usage, George mentioned, we know that in the past, you've been somewhat acquisitive. Obviously, we've got Reinhart and Eby-Brown. I think you mentioned that in the short term, as business recovers, it's kind of just more focused on your core business, but it seems like you have a balance sheet capacity. So I'm just wondering, as you think about it, is the primary hindrance to acquisition being just the divergence and appropriate valuations, you believe? Or is it -- I know sometimes people talk about maybe don't acquire another business, but maybe do the best drive you can in terms of taking some of those customers without actually having to acquire the business. How do you kind of think about the balance of those 2 things and maybe what the hindrance is to more acquisitions?

Yes. First, as I've stated, and George can certainly comment, but I'd say that your commentary on valuation is correct, and that's what George alluded to earlier as the primary in it.

Yes. And all our channels that were in aren't as difficult to value today as the foodservice would be. So we're going to continue to be acquisitive. And then I think the day will come in foodservice where it will consolidate more, and I think we're well positioned. And if we see a good cultural fit and the right value, we're certainly going to be acquisitive.

And then is there any -- as I think about the synergies with the acquisitions you've made, I think you said you're quite comfortable with the Reinhart synergies. Is that a process where you start with a certain amount and then in coming quarters and years, you realize that there's significantly more? Or do you find that you've been able to pretty much nail the synergies when you're still looking at the business and, therefore, there's no big surprise in terms of incremental synergies as you dig further in?

Well, we're not able to nail anything until we've owned it because you always learn. As a matter of fact, we never nail anything and truly until we get close. We're careful. You buy a business because you think it's a good business, you think they've got good people. And then if you move too fast with synergies or you do the wrong ones, you can do that, too. Then why did you do it? I mean why did you spend that money if you didn't like the business or if you had to change the business so dramatically? So those cultural fits are really important to us. And there's businesses out there that there isn't a multiple that we would pay that we would want it, and there's other businesses that we would recover. So we're going to be out there. We're going to be looking, and we won't be overanxious, but we're going to be looking. And I do believe this is an industry that will continue to consolidate.

When you mentioned kind of being out there and looking, I'm just curious, as you think back to the acquisitions you've done, is it more often than not you approaching somebody else and saying we're interested in your business and having discussions? Or is it perhaps the potential acquiree coming to you and say, "We'd love to join the PFGC family for whatever reason that might be?" Kind of how do you think about that?

Well, the last 2 we do were very, very long-term conversations. And there wasn't any other acquirer involved. And I think that's ideal, right? I mean, you know each other well. And then you just -- you could just push to that. It's always -- almost always the biggest issue, the valuation. And we keep in touch with the people. Maybe not enough, but we keep in touch with people. And we think we know who the ones are that culturally would fit. And we tend not to be the one to approach the other person.

That's very interesting. I would assume that would be you kind of going out and seeing who you'd like. But presumably, it's kind of like the dating game, I guess, to a certain degree. Well, I think we're wrapping up on the end of our timing for our fireside chat. I know you guys have meetings throughout the day. But George, Jim, Bill, I wanted to thank you all very much for your participation in the chat and Performance Food Group more broadly. I look forward to the day when we could be doing this in person. But thank you again. Hope you have a great day at the meetings.

Thank you, Jeff.

Thank you.