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

All right. I'm going to go ahead and get started with some intros here. I'm Kelly Bania, Food Retail and Distribution Analyst. Thrilled to have PFG join us. A lot of interest for PFG. They are a top 3 distributor in the U.S. in the foodservice industry on pace to generate about $58 billion in sales across its 3 segments. So that's Performance Foodservice, which drives the majority of the profitability but also the highly profitable Vistar segment, as well as the Convenience distribution segment. So in the summer of 2022, PFG outlined a 3-year plan to reach $1.5 billion to $1.7 billion in EBITDA by fiscal '25, which I recall seemed kind of crazy at that time, and we are well on our way to hit that actually the low end of that this year. So that would mark significant growth for the company since your IPO, which I think was maybe 9 or 10 years ago. So thrilled to have George Holm, CEO and Chairman of PFG, George founded Vistar in 2002 and became CEO when it was acquired by Vistar in 2008; and Patrick Hatcher, EVP and CFO. He's been in the CFO seat since January of last year, previously President and COO of Vistar and Bill Marshall with IR, who many of us, I'm sure, know. So many questions for PFG.

We just had earnings across the group. One thing that I wanted to start with was maybe the organizational structure and some of the changes that were made in terms of Scott McPherson, taking over the EVP and Chief Field Operations Officer role. So maybe just tell us what prompted that? How that's going, and we'll start there.

I guess one of the big reasons is we're aging out.

Okay.

We got to get the kind of the next group of management developed and Scott had been the CEO of Core-Mark when we bought Core-Mark. So he has a public company CEO experience, and we needed to get him more involved in the Performance Foodservice business. He had had Vistar for a period of time. So he basically has all of our operating businesses, almost all of those. And that, in conjunction with putting Patrick into the CFO role, who also has a good operating background, we think we're kind of getting for that right for that next generation.

Perfect. Okay. That's kind of what I expected, but it's nice to hear. So M&A is also just a really big topic for PFG and the space. It seems like as of late, there's been just a couple of smaller deals for PFG. So maybe even though they're small, I just would love to kind of hear what was attractive about the recent acquisitions. I'm talking Green Rabbit and Orion, I think I'm saying that right. Just what was attractive and why those today?

Okay. Actually, it's OLM but it's the Old Orion and the Old Landmark that merged together. So once was a big producer of ingredients for pizza and they do premade pizzas. We sell a lot of premade pizzas, and we've had trouble getting a consistent supply and getting the type of product that we want. So it gives us a little bit more control with it. They were a customer of our cheese plant and they were a supplier of other items to us before we did the purchase. And just gets us a step closer to the customer. And then they have several convenience stores, some that are independent, some that are small chains that actually have -- they have a franchise program and they use them for pizza and sandwiches. With Green Rabbit, we have a fulfillment business that's primarily for CPGs. It's heavy chocolate candy, snacks, those type of areas. And they're in that same business as well. So we had 3 distribution centers that do fulfillment and they have 3 distribution centers that do fulfillment. We wanted to expand our geography and expand our capabilities. They have -- their largest one is in Indianapolis, and it does a significant freezer and cooler business, which were all ambient product. And we look at that as an important part of our business in the future. And when I say fulfillment, we're doing it for our suppliers, and we're doing it for our customers depending on what their needs are. So a big part of it would be what you see the cash register impulse-buy items. Very few people do that themselves. So it's a big part of their business. And then if you're going online and you're ordering product to your home or it may even be through Amazon, some of those products, we're doing the fulfillment of those products.

Okay. And so I want to go back to that. So when you say ambient, we're talking Vistar, but freezer cooler you see as an opportunity within Vistar long term?

Correct.

So what would that -- where would those -- where would that fit? I'm just trying to understand this because today, it is all really ambient, correct? Well, maybe some chocolate I guess.

Yes. You want to...

Yes, sure. I'll add in. First of all. Thank you for having us, Kelly in the conference. Yes. So Vistar traditionally shipped more perishable products, but like you said, it's chocolate. It's nothing -- this would allow us to get into more things that do sit in a freezer or refrigerator and ship to the consumer. So this could be meals, it could be preprepared meals, it could be -- it could even be honestly, animal, dog, cat food, those type of things. Anything that's being shipped to that consumer that requires some refrigeration along the way. And what Green Rabbit brought to us was like a much more sophisticated way of keeping those items in their proper conditions so they get delivered correctly.

Okay. I want to come back to Vistar because I think there's a lot of questions there. But I would say the biggest question I feel like we have to talk about is just that lower-income consumer. Every company is talking about it. I feel like in my space, what do you think is really happening out there? Are consumers really just getting fatigued with menu prices. Restaurant prices don't tend to come down. So I'm not sure what we can do about that. But what can we do for...

Yes, I think what I would speak to is more what we're seeing -- what customers were seeing that are impacted. Probably the biggest impact on Convenience and Vistar because they're selling packaged products from candy bars to protein bars to prepared food, a lot of it going into the workplace, a lot of it going into blue-collar workplaces where people are a little stressed. And if you think about that consumer where we've had the very large inflation has been around rent fuel, and that's a significant part of someone's compensation is to pay for those 3 things. So, that's really where we're seeing the most stress. We're seeing same-store sales declines. And I think people just have to get used to a different pricing level.

So in your experience, have you seen something like this where you're seeing these kind of negative declines in these categories and takes the consumer x months or quarters to adjust and go, okay, this is what we're dealing with.

Yes. But it's been more on reduced compensation than increased prices in the past, particularly during the great recession, we saw it. So this is a little bit different. Now we are seeing that manufacturers are backing off a little bit. They're not going to lower their price. Never going to happen. Never seen it happen and I doubt that we ever will. Candy would be a great example. Right now, cocoa is the highest it's ever been -- significantly higher than it's ever been. They took 2 price increases last year. They didn't take a price increase, in spite of this big increase in cost of goods because they've seen the impact that it has on demand. But every time we see a price increase in that category, we see a slight decline and they get used to it, and it comes back. Then what we're seeing in the restaurant area is, I think it's the same type, the same -- I guess, discretionary income type where it's our QSR and our somewhat lower price point chains, particularly that we're seeing affected with the negative comps. Even somebody because they're public and the numbers are out there, but a Cracker Barrel who we've sold since they started and had never seen this kind of softness. But they're a fixed income heavy customer base. And it's just the reality that we're dealing with today. But fortunately, we're diversified enough or it's not having that great impact.

So I want to transition to Foodservice and maybe this is a good point to bring up here on those kind of lower price points because you are so big with pizza and Roma. So can you remind us just where we are in the cycle of pizza? I know it did really well and then it gave back. And it's a big part of your Foodservice business. Like can you remind us how big is like Italian pizza, for PF, for the Foodservice? And what are you seeing for those price points?

Pizza would be a bigger part of, I guess, who we are than it is percent of sales because it's so much of our heritage. But we have about a 37% share last report we got of the independent pizza business in the country. So we're big. Flourished unbelievably during COVID. I mean it's just amazing the growth that we saw through that. Then as other choices became available and other people got into takeout and delivery, and you were able to go into a restaurant again. Then we saw a drop off some. And as they came up against those real high numbers, we still grew, but we had trouble growing. We just continue to gain share in Pizza. I think right now, I think that it's slow, okay, Pizza is. And I think that goes back to the people that are regular consumers of pizza, it's a great value, they're just not making as many trips as they've made in the past.

Okay, I want to talk about the sales force. There's more change it feels like going on across the competitive set with the sales force. So I guess, number one, the question is, do you expect to see any impact from others maybe starting to increase their sales force size? And how long -- how many years can PFG sustain, I think you guys target 8% to 10% investment in the sales force headcount. Like how many years can we continue to do that?

Well, we've typically been about 6%. And we got behind during COVID. So we decided we were going to catch up. And this is not a decision that I'm making or Pat's making, this is within our opco. Some didn't get behind. But -- so it's -- we're rolling up numbers, but it's a much more local decision. So we did get to where we're running 10% more salespeople than the previous year. We're at about 5.5% now. Now what's happened is we've lapped this surge of people that we did. And we also found out that at that time, it was too many people to train at one time. So we didn't have as high a retention rate of people coming and learning the business and being successful. We're a company that pays straight commission. So you got to be successful. We also hired more people with a culinary background than people experienced in our business, not hugely more, but that was more of the ones that didn't succeed. So I think what you'll see from us now is we'll be back on that 6%, maybe 7%. But we've done that. We've done that since 2008. We don't have any intention of stopping now. So...

So, okay. And what is -- I guess, maybe you just said it, the down side of growing too fast is that training process? Or is there any other downside of maybe investing...

It's training process. It's really important and selecting the right people and sometimes when you're trying to do it quicker, maybe you don't do quite as well with the selection. And it's a lifestyle job. I mean, they're on call all the time. Sunday is a big day, in order Sunday for Monday delivery. There's also periods of time during the week that are slow, you get a pretty good gap at lunch for you, you don't have as much to do. . Where if you're bringing somebody from culinary, they're used to going to a place and working in that place the whole time. They're not running around and doing the things our people have to do. And they also operate with a pretty relaxed morning. You're doing prep, you're drinking coffee, you're chatting and then you get slammed for couple of hours, and then it gets pretty relaxed again and you get slammed for a couple of hours, where ours is -- it's constant. And it's -- like I said, it's a lifestyle job. So we probably didn't do as good a job in the selection process for that period of time. But we're back on track, it didn't have any impact on our growth, just spend a little bit more money.

So, training is a key part of that, but what other tools do you give these local sales reps that you feel like maybe differentiate them? Because the growth for PFG's local business has been leading the industry and quite impressive over the years.

First of all, they're commissioned. So you have to have a certain type of person that wants to go right their own paycheck and is very ambitious and wants to make good money. And we have several, I mean thousands or what, maybe not 1,000, so over 1,000 that make really, really good money. So I think that's a big part of it. They -- when they walk out of that account, make out their order, they can press one button and they know how much they made. I think that's impactful. We have a CRM like most people do. We don't require a certain use of it. We have people that use every bell and whistle that we have and are successful, and we have people that write their orders on a piece of paper and then go back and punch them in and are very successful. So it's not a cookie-cutter situation. I think the other thing that, to me, we give them is that our commission program literally hasn't changed at all in 23 years. We've had the same commission system. So they know it and they know it really well. And you're going to attract a different type of person. And if you are commissioning that you have a salary and then you go salary plus bonus or they just get confused and it's a different person that -- I mean, if we told our people, they're going to go on a salary, they would flip out, right? I mean they're there to make good money. So -- but as far as like -- from a tech standpoint, I think they have everything to work with that our competitors and our industry have. It just isn't as -- there's no requirement around it in that way.

Right. So is that standard across the industry? Because it feels like some have changed their compensation structures, maybe some of that was late -- from late reaction from COVID, but across the independents, I mean, is it all commission-based? Or do you feel like you guys do a better job at motivating with that commission structure?

I don't want to overplay this -- we don't change. So we don't have this -- it's very disruptive when you go through a compensation change. and people have this having a real serious about how they're paid. People like to know how they're paid. And it's a hard job. So it has to be lucrative if you're a performer.

Right. Another question, then I want to go to Vistar, but there's been some changes in the rules around noncompetes. So does that impact your sales force and how you guys go to market? Or is that just not a big deal?

The way that we understand it, there still can be nonsolicitations in it. If it were up to us, I would love there to be no noncompetes because we hire people and wait a year before they can go visit their account. But it sounds like that's not going to change with this.

Okay. Okay. So maybe it's a nonevent. Okay. So let's maybe switch to Vistar, which I know, Patrick, you were running really. So maybe we'll switch over to you. But I guess there's so many channels within Vistar now. It's been a story of expanding into different channels. Is there any more areas that we can go into? Or is this -- we're getting to a more mature kind of growth with these channels? How should we think about that?

Yes. I mean, it's a question we've been getting for some time because everyone -- every time we go into a new channel, like is there anything more, and there's always more. And I think -- the really interesting thing is we've talked about this in the past, is what's going on within some of the channels we do serve really well, like the vending channel, which people think, oh, traditionally, this is just a box with 38 items. But they've moved into micro markets. We've talked a lot about the micro markets, and we continue to see our customers move aggressively away from the machines into these micro markets because, again, you can provide so many more items than you can in a traditional vending machine, you can have hot, cold refrigerated. You can have meals, candy snacks and beverages. So it just gives that consumer a lot more choice but also gives our customers the ability to service that customer in a much broader way than they've traditionally done. So Vistar continues to stay on the forefront of that of making sure they're bringing in the right items to service the customers. But that has definitely helped them in their growth. Other channels, there's always opportunities. I mean we're constantly looking at additional things. And we've talked through things like gambling and military and all those different areas that we do have some business in, but there's a huge opportunity there, and they'll just continue to look at different opportunities. They've been really successful at finding areas where there's a grab-and-go opportunity. There's a snacking opportunity. There's a drink opportunity and getting the products there.

That makes sense. When I think about PF Foodservice, I think about it as such a mix story, right, mixing with private label, mixing with independents. When I think about Vistar, what's the most important thing from a mix standpoint? Or is it less about mix?

Mix is huge. It's really about those categories I was talking about. So what they make on saying, on the case of candy bars versus what they might make a case of refrigerated items, all those different categories have different markups and different margins on them. So a lot of the things they've done, like we've talked about, good to go in the past, where we've really focused on healthier for you items for the consumer, those generally drive higher margins. So they've -- mix has definitely played a part of it.

Okay. And then there's comments, I think the last couple of quarters, you have some new customers coming on, but just the pipeline of new business sounds still very strong for Vistar. So where is that coming from? Who are the key competitors for Vistar?