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

All right. Good afternoon I guess it is. My name is Jake Bartlett. I'm the food service distribution analyst at Truist Securities. And I'm joined up on the stage by Performance Food Group's Chairman and CEO, George Holm; and incoming CFO, Patrick Hatcher. For those of you who don't know them, George is a long-time industry veteran and founder of Vistar, one of Performance segments. And Patrick was previously the President and COO of Vistar and has recently become the new CFO, joined the company, I believe, in 2010.

So I want to start with a big picture question and really kind of the aftermath of what we've gone through in the last 3 years with the pandemic. It seems like -- it has been an environment where the largest players have been able to gain a lot of share, provide service -- be able to service customers. Also, margins have been pressured overall, but gross profits have been really kind of, I think, record high or fairly high. So the question is what remains in the situation going forward of those changes over the last 3 years, how does that impact you think the industry going forward?

Well, I think the biggest thing is labor right now. That's what really hasn't normalized to pre-COVID levels. And the other thing that still exists is this big variance versus the previous year from a week-to-week basis. An example would be last year, December was actually pretty strong. People were back with Christmas parties and holiday parties and all that. And then Omicron hit. And it really went down. So what we've seen is a couple of weeks of really tough comparisons and then all of a sudden, last year's numbers are easy to significantly jump over. So we still have that inconsistency. The margins, as you say, gross margins have been good, but the labor costs have been high, and productivity has been low. So what we're seeing now is the stabilization of the margins, which is good to see a big percentage of our business is contractual. So we've redone just about every agreement that we have with the customer to get a better margin profile. Now it's a matter of getting the productivity back to pre-COVID levels that will do a lot for our business. And then also the inflation is dropping, and it's dropping at a fairly quick pace, at least inflation versus previous year to the point where there's no real sequential inflation, but that period of time where we went through the sequential inflation was very good from an inventory gain pickup. So that offset a good bit of the labor issues. So moving forward, I think the most important thing is to get some stability, which we're not going to have this quarter. I think we're going to have easy comparisons early in the quarter. And then right around Valentine's Day last year, Omicron kind of blew through. People had a lot of cabin fever, and the end of February and March were probably outsized period of time. So we need to get that stabilization because that helps with labor too. It's very difficult from a labor standpoint if you've got 4% growth 1 week and then 18% and then 5% and then 10%. It just -- it's really difficult and then we should see some better costs.

Got it. Got it. I wanted to just -- this is a bigger picture question, but -- and also playing into how it might impact your performance in what could be a slowdown. But can you just go into a little more detail as to how performance operates differently than some of its larger competitors? And how -- you've very consistently grown cases faster than most of your peers. In a nutshell, kind of what is that -- what do you attribute that to? And then also, in a pressured environment, does that advantage -- does that become a greater advantage or less so? Or how does the position?

Well, I think I have to preface that with the market seems to throw 3 of us in the same bucket as in Cisco and U.S. and we actually have quite different customer mixes. When you get to independent food service work, that's kind of head-to-head competitors. You go west and other than Texas, we only have one broad liner in the western part of the country. So we're very different. The industry -- all industries, people look at things differently. But we've kind of really chosen to invest heavily in people to be a follower from an IT standpoint or a system standpoint, we try from a customer-facing to be in front of the customer as much as it's possible. So we're reluctant to give up face time. I think that helps us the 2x where we gained the most share at least according to what we see in NPD, which does have all the broad liners in there. The 2x we gained the most share were during the recessionary period and then big COVID, particularly when COVID first hit, but we kept our entire sales force and tacked. We did furlough some people that weren't training to be in sales, but not existing salespeople. I think that was probably a key. And we also had a good customer base on the restaurant side of our business for independent for COVID because pizza did extremely well and the Hispanic business did extremely well, and we're kind of outsized shares in those 2 businesses. And I like to believe that our autonomy has done a good bit for us because, particularly going through a situation like COVID, everybody was in a different situation. And we just found that we couldn't throw a blanket over the company and make decisions and say you're all going to do this. just doesn't work.

Right. You mentioned on your last call that your growth is coming more from new account generation than existing accounts that existing account gen -- likely having some pressure on traffic. As you think about an environment where we're this recessionary traffic goes down, do you feel like -- are you feeling optimistic that the amount of new accounts that you can generate is going to be sufficient to offset the pressure from existing accounts or there that opportunity?

Yes, I do. And -- the situation has continued to get -- the market were more dependent on new accounts than we've ever been, even more so than when I last spoke. The increase in new accounts that we have today would typically for us produce a double digit -- low double digit, but double-digit case growth, and we're not seeing that today. And it's the first time that we've grown our customer base faster than we've grown our cases. So when you really dig into it, even at the SKU level within the accounts we're growing, they're just not using as much of the product or buying it as frequently as they were buying it before. So that has to be our focus right now is this new business.

I imagine you're not going to share your long-term guidance up here on stage with me today. But I'm wondering whether -- which you provided this summer, but I'm wondering whether there's been any changes you can talk about in terms of how you get there? And I think of -- in recent quarter, at least the recent quarter, some slower growth at the chain business, I think you're not alone on that front. But do you think we can get to that long-term guidance in a different way, maybe more dependent on independents than chain than you're thinking about?

Yes. Well, If you look at it today, we had a few quarters where inflation, inventory gains helped us. It didn't last quarter, but we still overcame that. Our case growth and independent for us is a disappointment. And of course, national accounts being down, our brands have been a real bright spot, and that comes with better margins. And then if you go into Vistar, they've just still a little slow with theater and office coffee, but everything has come just roaring back. They're doing phenomenal. And with Core-Mark, we're running -- outside of tobacco, we're running mid-teens growth, but the tobacco has been down more than normal. And of course, that's been going down for years and will for years. So I think that right now, we're getting there a little different path than we thought we would get there. But that's encouraging to me because our underlying numbers, the increase in number of accounts, the increase in SKUs that we sell the accounts, they're not producing the sales growth we're used to, but it's really encouraging for -- as the industry gets better. I think one of the other things that has affected the individual restauranteur is there's just more and more restaurants. And I look at where I live. I have a place down here, I was down there for 4 days. And the restaurants that were closed before almost every instance, there's somebody new in there because they're single purpose buildings really. I mean it's unusual to see a restaurant be vacant and then something else come in and take that space. I mean you've got equipment in there, you've got cooler, you've got refrigeration. And I think that's part of the slowness at the account level. And we'll just see if we were in maybe a little bit of a bubble period last year and what the next quarter looks like. But it's very hard to predict. And like I said, that's part of the labor issue is volume swings week to week.

Great. I'm going to get to labor, I wanted just to start with a question on gross profit per case. And they've obviously been elevated across the industry. And I'm wondering how much do you think that is temporary? It's been -- your customers have been much more focused on service like getting serviced. So is it sustainable the level -- I think there's some concern from investors that maybe there's been some over-earning in that environment and that you have to kind of give that back?

I'll comment on that, then I'm going to have Patrick comment typically on Vistar with is I won't go the Vistar route with it. Core-Mark, most of our agreements, almost all of them are on a margin basis. And that contributed well to the gross profit per case and made up for a portion of the increased labor that they've experienced. And almost all the customers are on a contractual agreement. So I don't see it having any impact there. There certainly isn't going to be deflation. Coffee is really the only commodity that they're involved with. When you go to the Foodservice side and the national account area, we renegotiated our terms with almost every customer. And where we weren't successful, we exited the business, and we did have to exit much business, which was good. But a lot of our margin and gross profit per case growth was just a change in mix of business with national down, independent up and then our brands up significantly. So that's kind of where we're at today, I don't really see that changing. The only thing from a gross margin, I see is that pretty doubtful we'll have the kind of inventory gains this calendar year that we had last calendar year, at least the first 3 quarters of last calendar year. Otherwise, I don't really see a change mainly because it was mix driven. You can comment on Vistar.

Yes. Thank you. So when it comes to Vistar, it's very similar actually to Core-Mark, very nationally driven, very contract-driven. So I really don't expect to see that to change. What's happening within Vistar, though, is some mix of business just between the different channels. And so some of the channels are still recovering, while others have already recovered back to 2019 levels and are continuing to grow. So because of that channel mix, they're actually seeing positive gross profit per case as well.

This next question has a lot of moving pieces. So it's going to be interesting to try to answer it succinctly. But...

Without notes.

Right, right. But the question is, sometimes we hear the larger food service distributors have exposure to so many different kinds of restaurants that they'll be okay no matter kind of what happens on a macro basis. But there will be impacts to the margins, right, to what types of customers are having growing sales. So the question is, on balance, if there is a pressured environment, what happens to margins? It seems like you'll benefit, for instance, from the performance brand mix going up. Vistar has some segments that are just recovering independent may be of a macro environment. But how should we think of margins in a -- if you think there's going to be a recession, the consumer is going to be pressured, when does that mean kind of on average for performance?

Is it about gross margins or EBITDA margins?