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

Good morning and thank you for joining us. My name is Jeff Bernstein, and I'm the restaurant and foodservice distribution analyst at Barclays. I'm thrilled to introduce our next presenting company, Performance Food Group. With us this morning mostly from Richmond, Virginia, we have George Holm, Chairman, President and CEO; and Bill Marshall, VP of Investor Relations. And in the sunnier Austin, Texas, we have Jim Hope, EVP and CFO. By way of background for those not familiar, Performance Food Group is a leader in U.S. foodservice distribution, supplying over 300,000 locations from 150-plus distribution centers in the U.S. and Canada. There are 3 large publicly traded U.S. foodservice distributors and then thousands of small to midsize, which leads to tremendous market share opportunity for someone like Performance Food Group. We wanted to thank you, George, Jim and Bill for joining us. And before we actually dive any deeper, I will turn it over to Bill for a quick legal disclosure.

Thanks, Jeff. Good morning, everyone. Just before we get started, I just want to remind everyone of a few items. So earlier this morning, we issued a press release regarding our fiscal 2022 outlook, which can be found in the Investor Relations section on our website at pfgc.com. Our remarks during this presentation and in the press release contain forward-looking statements, statements and projections of future results. Please review the cautionary forward-looking statements section in today's press release and our SEC filings for various factors that could cause our actual results to differ materially from our forward-looking statements and projections. With that, I'll turn it back over to Jeff.

Thank you, Bill. So yes, I wanted to kick it off with some bigger picture industry questions. But I had to slide in one this morning when I saw a press release come out specific to Performance Food Group this morning. It looks like you reaffirmed your outlook for the current 2Q of fiscal '22, which ends in a few weeks, as well as reaffirming the full year fiscal '22 in terms of both net sales and EBITDA that you provided back on, I believe, November 10, which just over 3 weeks ago. Just wondering if there's anything -- any additional color you'd like to share in terms of that reiteration of trend. Obviously, it's reassuring. Anything to share in terms of trends throughout the quarter thus far, or whether you just want to leave it at that.

Jeff, it should be reassuring. I think what I'd say is the assumptions that our original guidance was based on that we provided on the earnings call, all remain true. Execution is on track, and we're confident in our business and the results we're going to deliver across the year.

That's great. Now it's nice to get some reassurance with all the volatility we see week to week, so it's great to hear. We look forward to the full reporting of that. Otherwise, more broadly speaking, George, I just can't help but think as you lie in bed at night, just in terms of when you think about your business and the broader industry, it just seems like it's such an unprecedented environment. I know many people look to you as kind of a leader in the industry for a long, long time. I'm just wondering what is it that most concerns you? Whether it's sales or inflation or menu pricing or just the variance. And is there anything in particular that you'd say is most concerning in this current environment for you and your business?

Well, it is so volatile that the volatility doesn't keep me up at night anymore. I'm used to it. But I worry about labor all the way across for our customer, for ourselves, for our supplier. And then just supply of product, I mean last week was actually our third worst inbound. [Technical Difficulty] fill rate that we've had particularly tough on the Vistar side of the business [indiscernible] It takes a little bit of the pressure off there. But it's labor when it comes down to it. That's the big issue, I think. Because the other issues to me are pretty much caused by the lack of labor.

Understood. And you mentioned -- we know it's volatile in terms of the inbound. Is that a -- do you think it's a new trend for the industry? And I know last week was Thanksgiving, so everything could be a little bit choppier. But do you see weeks that are great, and then weeks that are horrible from an infill or inbound perspective? Or is it something that's more concerning in the near term?

Well, every week is horrible, okay. And that's something you don't get used to with the fill rates. But what we can't really quantify is what impact it's having on our business. We find customers are open to substitutions more so than ever. So that is -- a big part of our business is making sure that we get something to them that works for them. Then on the Vistar side of our business, be it legacy Vistar or convenience, we have this situation where the -- a lot of SKUs aren't being produced. So we're buying, we're placing them on every order and not getting them. And our customers are ordering it every time, and it might not be something they would typically order every time. So I think that something else has taken the place of that sale, and the consumers just reaching for a different candy bars the ones out of stock, for an example. So we have a tough time determining that, but what is concerning is that we're not seeing much in the way of improvement. Now we are seeing improvement ourselves in labor. Less temps, and that's tough. Even if you get a good one, they got a big learning curve to climb. So we figure if ours is getting better, that's going to happen in the manufacturing community. And we're hoping that we get past this new year, we'll see better, better there.

Yes. Right. And I think more broadly as you look back over the past 20 months, it seems like COVID had an accelerating effect on what we thought were structural changes going on for a few years already. I'm just wondering maybe you could talk about what has been the most transformative change during the crisis to your business or the broader industry, either positive or negative in terms of what maybe COVID accelerated or led -- is driving acceleration of structural change in the industry.

Well, there's the obvious ones. That's takeout and delivery. As seats were available again and people coming back into restaurants, we saw a decline in our takeout and delivery packaging, but not much. So that was very encouraging. What's also encouraging for us in our pizza business is people are creatures of habit there and that restaurant that somebody went to every week and got their pizza every week, well, they were in there 2 times a week. And maybe they tried other items, and now they're seeing that customer regularly 2x a week. Because I was very concerned when we came up against that peak time last year of shelter in place and nobody was seeing anybody. And pizza did extremely well. I thought we were going to have trouble lapping those numbers, and we did not. We've continued to run double-digit growth there. So that's been encouraging. But I think that's -- that could be a real change. I think that the other thing is, to put this right, we learned just how fine-tuned our industry was from the size of proteins to where -- it's different from retail and all of a sudden, there was an abundance and then there was very little of certain products. How quickly we turned our inventory versus the delivery frequency and the lead times that we gave the supplier and always looking for another way to get 1/4 of a day's worth of inventory out. I think that moving forward, I think that we'll be more cognizant of potential things, downsides that could happen. I mean if we are unfortunate enough to end up back in a shelter-in-place situation, we would handle it differently than we handled it last time and I feel much better. So I think there's been a lot of learnings from this. But what I'm starting to see now, particularly in the chain business, is those people that were struggling going into COVID, they are struggling. Those people that were doing well going into COVID, are doing well now. That has somewhat normalized long-term winners because of it. I think people are very effective with takeout and delivery curbside, probably will continue to do better. We had that surge, anybody that had drive-through, which we don't but have many customers that do. But the ones that we did, did extremely well. I don't think that is a long-term benefit for people. And I think that the last thing I would say there is a learning from there is that we -- well, we won't be quite as tight with inventory. The same with labor. I think you have to ramp yourself up. Not to the point of irresponsible around expenses, but you got to make sure you have the labor available.

Right, just curious because a new variant is already upon us over the past week and we're quickly moving along the Greek alphabet. I'm just wondering, like you said, how does your system prepare for this one versus the last? Like what's the -- is there -- do you have a -- an alarm emergency meeting on Monday morning to change? Like you said, you'd do this better this time around. Or at this point, are most of the protocols in place? Like what would be the biggest difference? Is -- has that been implemented over the past week? Or is this not as concerning with each passing variant?

Well, I'll give you what I feel what we would do differently is, we kept our salespeople. We did furlough some, it was less than 90 days. We would keep more drivers than we did before. And we would keep particularly more night crew than we did before. It's kind of hard on days [indiscernible] product. I think that's critical, and I think probably the whole industry would do that. You need experienced people. There was really a point from a labor standpoint where we're improving and we're improving quick. Our amount of temps are going down at a pretty good rate right now. And we have distribution centers where we are back to what we would call full employment. So it would be employment we had pre-COVID plus what you would need for the growth that we're experiencing. And we're still struggling to meet the needs of our customers in the way in which we're accustomed to doing, and it's because of this learning curve that they're going through. It's not a real difficult job to learn, but it takes time to get really good at it. And so I would say, in most places we're into that next phase where it's all about getting back to the levels of productivity. But when you lose experienced people, it's really difficult. And then rather than furlough someone, if you only had 25 hours of work for them a week, I think it's important that you keep them. It's also a physical job, and they stay in great shape because their job keeps them in great shape. So if they're sitting at home for even a few months, they come back to work, they don't have the physical conditioning that they need to do the job. So a lot of learnings from this. And in the end really, I don't think the expense is that material versus when things came back, the amount of money you're spending to satisfy the needs of your customers is just really greater than what you would have spent to keep more people.

Jeff, we have a battle-tested playbook on how to handle the situation that we faced before, if it were to arise again. And we have very experienced people that have already been through the situation. So that gives us confidence. Those folks know every step of the playbook. And they know, as George just mentioned, what works and what needs to be improved. So that gives us confidence and comfort that we can handle what we face ahead. We feel very good about where we are.

Yes. And in terms of the customer opportunity, I think most investors tend to think of growth in terms of adding an entirely new accounts or M&A, which you've obviously pursued. But it does seem like, in our view, the greatest opportunity perhaps is just growing share with existing, just because it seems like you already have that relationship. Just wondering if you can talk a little bit about your current penetration with your existing customers, whether chain or independent? And how much of an opportunity is that really? Or will it forever only kind of stay at a certain level for some structural reasons?

Well, we always track our business real close, how much new business we have; how much, unfortunately, business we've lost; and then how much our growth is coming from better penetration within the customer. And we are just so significantly better from a penetration standpoint than we've ever been. I think part of that is there are less places open. Not what people predicted, but there are less places open. There may be a degree of pent-up demand out there. But since things have kind of come back, we haven't seen that customer growth over the previous year wane at all. It's actually gotten a little bit better. We haven't had a big focus on new customers. We make sure that -- well, first of all, you want to make sure you're taking care of that loyal customer. But secondly, you don't want a new customer to see at your worst than we've been at our worst is probably everybody has, but I can assure you we have. I think that long term, new business is going to be the biggest growth vehicle that we will have again. We're certainly going to ramp up for that. We need more employees in many places that we have to do that. Yet, we're still running good increases in number of independent accounts over 2 years ago. We are running less in national accounts primarily due to closures. But I think it's a business where you've got to get new business to kind of feed the monster.

That seems like -- some in the industry talk about getting to like 1/3 of a customers' needs, 30%, 35% penetration with that customer. Is that a level that you're at? Or would you say there's -- you're above or below with opportunity to expand that? Is that kind of a rule of thumb for the industry? Or is that...

Yes. I think that's just somebody's feel. I think it's hard to get at that information that's credible. Where we tend to penetrate the best is where we have the higher SKU mix. You get a legacy Roma company who are primarily pizza Italian. We haven't increased the penetration as much, particularly from some lines because we tend to have those lines already. But I think that as we grow our SKU mix as we kind of get more important to the customer, I think we'll continue to see it. I would suspect, and this is just my gut feel, I think we have far more than 35% of the business where we sell to customer. I -- that's -- I can't put my hands on different numbers that we could say it's [indiscernible]

Understood. Right, and then as I think about future profitability, it seems like a lot of yourself and your peers and of course, the restaurant industry, you're talking about doing more with less from an efficiency standpoint or with the help of technology. And with sales now back to full strength or close to, it would seem like there's potential upside to your historic margin. Again, right now in the inflationary environment, hard to really see through that. But it would seem like all the things you've implemented over the past 20 months might leave you in a better place from a margin standpoint. Is that reasonable to assume in theory? Or is there some reason to believe that would not be the case for some other pressures that you might be feeling?

Well, are you talking gross margin or EBITDA margins?

I was talking about EBITDA margins.

The way I would put that is that we have historically improved our EBITDA margins really just almost in every year basis. We've taken a step backwards from an EBITDA margin standpoint, obviously forward with EBITDA with the purchase of Eby-Brown because of the tobacco component, which is an unfortunate part of the business that you have to have if you're going to be in the convenience business. And we think we're particularly well suited for that because of kind of the combination of Vistar and Performance Foodservice. And we had significant earnings growth at Eby and continue to do well as a company. So our EBITDA margins went up during that period of time. And then obviously, with the purchase of Core-Mark, from an EBITDA margin standpoint, we took a big step backwards. From an EBITDA standpoint, we took a big step forward. You had mentioned the word peers. We compete against some really strong competitors, but not -- we don't have a direct peer. We have parts of our business where we look at our earnings more from how much we make per case, the percentage of the gross profit dollars that make it to the EBITDA line. So we look at it quite differently. But we want to improve against ourselves every year. And we're in a business where the case costs are real high or $100-plus cases of candy. And we pick up a big account in that world. It's not going to produce big EBITDA margins, but it's going to produce good profit and excellent return on capital. So I think that putting us in the same bucket with almost anybody I think is kind of difficult to do, so we don't do it ourselves. With that, Jim, you should probably jump in there a little bit too because Jim is really focused on that area.

Yes, sure, George. Thanks. Look, we have every reason to be confident, encouraged and believe that our margin will improve steadily over time. And I'll give you a handful of reasons why we have a heavy focus on independent business. That business is very important to us, and it's very helpful to our mix effect on margin. We do a really good job and we have room to improve, which is always helpful in our private brand or performance brands as we call them. That product is helpful from the standpoint of stickiness, but it's also very helpful from the standpoint of taking care of the customer and managing the order in our share of wallet. As Vistar begins to recover and continues to recover and we're really excited about what we see there. Vistar is a very high-margin piece of business for us, division for us, and that will do well for EBITDA margin. We're driving foodservice into convenience. And foodservice sales and convenience, as you know, is much more profitable. And then last, as labor begins to abate, we will see a lot of things that will help our margin from the standpoint of we'll need less contract workers, As George mentioned, there's a very steep premium paid for contract workers. Over time, we'll start to subside next. And then efficiencies come as people have been trained and experienced in the warehouse and driver ranks. And those things all help out our cost base. So that's just a handful of examples where I see us improving margin over the mid- to long term.

Yes. And Jeff, I should throw in there, when we speak to Vistar being really accretive to margins, that's the legacy Vistar. It's not the convenience part in there. Because when we look at the margins in Vistar, we don't look at the tobacco component of it. We're just filling demand there. So I think that's important. And Vistar, other than our large broadliners, does produce the highest EBITDA margins in our company. And I'm glad to say that --- we don't know November yet, but for October, they were back to their historical EBITDA margins. That was a big, big deal for us.

Understood. And Jim, you mentioned the private label is one of those options. And George, I know earlier you said the challenge from the inbound fill rates. Customers are open to more substitutions. Are you able to drive a higher private label penetration in this type of environment? Like I said, it's sticky and it's a better margin. So could this work in your favor from that regard, or no?

Well, Jeff, we've had several months in a row where our legacy performance business has been well over 50% of our sales in our brands. There was always a goal for us, but we didn't think that we would hit that by now. We -- as big as we are, in some ways, there's product areas where we're not really big enough to have a brand packed. So we've got further down that tail as we grow to continue to do better with it. And Reinhart is actually approaching those numbers, the legacy Reinhart companies. And that has helped us a great deal. And we have some of our branded product where our gross profit per case is in excess of double our average, really profitable areas and those are growing at a good rate, and we're seeding them into Reinhart to grow in there. So we're running gross profit per case independent actually much higher than we ever had. So it's had very -- this big inflation has had a very nominal impact on our gross margins in our independent business.

Got it. And shifting to the convenience store channel, my understanding is it is a slower-growth category than broadline. But post the Core acquisition, It would seem like there's not much in the way of incremental large-scale M&A remaining. I guess I get the impression that maybe investors are missing the mark on the opportunity with the convenience store channel that you guys have. So I'm wondering if you could just maybe give an update on the long-term growth opportunity within the convenience store channel, whether it's from new and existing customers, and maybe the cross-selling within Performance Food Group Foodservice.

Well, if you look at that business, Core-Mark has a little over 40,000 customers, and Eby has a little under 10,000 customers. Those are a lot of doors that we're going into. Neither one of those companies have the kind of cooler and freezer space to accommodate a customer that has a large foodservice commitment. So what we're working on now, and as I think Jim mentioned this [indiscernible] meetings here, but we're there next week all week at Core-Mark. What we're working on is where is that cutoff level where we put the product into Core-Mark's warehouses or we deliver out of both companies. Today we're actually doing more foodservice out of Performance Foodservice than we are doing out of Core-Mark. We just signed up 2 customers, one where we historically had the foodservice business. Core-Mark did not have the convenience business, and they will as of the 1st of March. And the other one where Core-Mark has historically had the convenience business, we did not have the foodservice business. They have a major commitment to foodservice. And as of January 1, we will have that business. So it was nice to get one of those kind of early on. We have a lot of work to do around our offering. We did a lot of work with Eby, but we're finding there's some regional preferences as you would expect, always is in food. I would say that it will be a lower-growth area only because we expect to see the cigarette case volumes, carton volumes drop year-to-year. And we don't -- we look at our sales without that anyway. And we think that convenience from a foodservice standpoint will certainly be an area we can grow, like we grow our independent foodservice business. And then the kind of the center of the store, we think we've got some things relationships supply-wise within this target that we're going to be able to grow well there as well.

And you talked about broader Vistar as one segment. I think it's hard for us to kind of peel back the onion. But with the acquisition of Eby-Brown and now Core-Mark in recent years, the legacy Vistar business seems to represent a pretty small component of Vistar at this point. Just wondering if you could walk through the margin dynamics that play within the segment. Like which verticals are higher and lower margin? Or where do you see the greatest opportunity for growth in that broader Vistar segment? Again, recognizing that there are kind of a few different components within there that are of reasonable size at this point.

Well, it's hard to do because there is so many variables, but I'll give it my best. The highest gross margin areas are the areas that have the lowest case cost. So when you get into value stores where they're selling product at a pretty low price, it's not a real big case size. Gross margins are good. Expenses are higher for that. But it has comparable margins, EBITDA margins. When you -- obviously the tobacco component of it has extremely low EBITDA margins, but it's actually a very small percentage of our queue. Then there's channels, and it's one of the reasons that it's hard to separate. There are channels that Core-Mark is in, Eby's in, and Vistar is in. And over time, we'll consolidate that. We'll get Eby and Core-Mark where they're pretty pure-play convenience businesses. And then within Vistar, we also have that pick and pack business in 3 automated distribution centers. And they were very difficult to get up and gone. All 3 are quite profitable ones actually, as profitable as Vistar is as a company on EBITDA line. We expect all 3 of them to get to that. I see no reason why they're very comparable. It's just length of time that you've been doing it. We'll do more of those that will help our EBITDA margins. Theater's a good part of our business. It does come with a fairly high case cost average. So not the kind of EBITDA margins that we put out in our other parts of Vistar, but a great contributor. Office coffee is pretty high case cost as well. Coffee's quite expensive, so not quite the EBITDA contributor. That's one of the reasons we're so pleased that we're back to the kind of EBITDA margins we used to run at Vistar is that 2 of our higher case cost areas, being theater and office coffee, have yet to recover fully. I mean theater's come back a lot. Office coffee has got to do with people getting back to work. So hopefully, that gives you a pretty good feel.

Yes. Right, and you mentioned, George, that labor would be the biggest challenge for you, if you were to prioritize kind of the challenges for the industry. I feel like there's been different hurdles where people felt like it would get better at a certain point in time. It doesn't seem like it's had the positive impact -- at least the end of the federal stimulus perhaps didn't seem to maybe have the positive impact on the labor force. I was wondering if you could maybe talk high level about your progress in hiring for the open positions. I know you have drivers. You have supply chain. You have the warehouse. I mean is there a significant amount of further hiring you need to be doing from here? Or is the challenge more with the people that are bringing the product to you that is more of a labor issue?

First of all, it's market by market. I would say that it seems that our suppliers are having a more difficult time. And maybe it's just got to do with the close contact that people have. We have -- we get plants sometimes that are just down because COVID just flies through the whole plant. Think about our drivers. They're not in contact with that many people. There's a kind of a built-in distancing of people in a warehouse and they're on the move. So we haven't had as much problems there. But it's hard work. And we really need to dig deep to make sure that we're getting people that really want to be a truck driver, want to work in a warehouse. We're throwing everything at it. I'm sure our competitors and other industries are as well. It's what makes it tough. We have had more success locally as far as our efforts to get people, than recruiting that we've done on a national basis. But we're doing both. And I just don't think it's going to be something that gets fully resolved quick. And as I mentioned, where we are back up to enough people, we have enough people but we don't have enough people at the current throughput levels to get the jobs done properly. So you have that learning curve as well. But that, I think, is the most difficult thing to deal with is labor.

Got it. So the commodity side of things, perhaps less of a concern. You believe that, that to be more maybe transitory? Or is it all just predicated on labor, and that's what's driving that problem?

Well, our center of the plate, we haven't had much in the way of issues. And we, by the way, we consider cheese, pizza cheese, to be center of the plate. But our suppliers have done really well for us there. Our top of the line beef program, we have control of supply all the way through. We had no issues there, so we're fortunate. Poultry has been very, very difficult. And it's been harder on the Vistar Core-Mark side of the business has been more difficult.

Well, I want to be sensitive to time. We just wrapped on our allotted time, but I wanted to take a moment again to thank Performance Food Group for joining us this morning. George, Jim and Bill, we really appreciate your time. And I know you've got meetings throughout the day, so hope you have a great day of meetings. We will stop in throughout to say hi. But if I don't get a chance to say it, we want to wish you a happy and healthy holiday season. Stay well, and we will talk to you soon.

Great. Thanks, Jeff.

Great. Thanks.

Thank you, George. Thanks, Jim and Bill.