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

Good morning, everyone. My name is Jeff Bernstein, and I'm the restaurant and foodservice distribution analyst here at Barclays. Our next fireside chat is with Performance Food Group. We want to thank everyone in the room and people on the webcast. With us this morning from Richmond, Virginia, we have George Holm, CEO; Patrick Hatcher, the CFO and a special guest in the audience, Scott McPherson, the Chief Field Operating Officer, kind of secretly listening in. By way of background, for those not familiar, Performance Food is one of the largest foodservice distributors in North America with north of 150 locations. They deliver food and related products to over 300,000 locations, including independent and chain restaurants, businesses, schools and health care facilities, vending and office coffee service distributors and big-box retailers, as well as theaters and convenience stores. So if you're buying food, they likely delivered it. So we want to thank everyone for joining us. I have a few kickoff questions on the broader consumer and then we'll dig into Performance Food Group's business specifically. But again, we very much want to thank Food Group, George and Patrick for joining us. Thank you.

All right. So being that it's a consumer discretionary conference, and you got to look at a whole lot of the consumer across many lenses. I was just hoping maybe you could share your thoughts very high level on the state of the consumer as you think about calendar '25, our restaurant industry at least, and a lot of the industries you serve, we know sales have been volatile and choppy depending on the segment. But yet, if you look at the macro data, employment is strong, which is usually closely correlated, inflation is easing, interest rates are coming down. Just wondering how you think about your business or the industry you serve and as you look to 2025 from a consumer standpoint?

Well, we're seeing things get better. It's albeit inching up like month-to-month. We still -- in the restaurant industry, we still see negative comps probably in the 3%, 3.5% range. I think a lot of it is driven by pricing. Just the inflation that took place, that took a restaurant a while before they put these menu price increases. And I think part of it was because there were less restaurants coming out of COVID, so they were all busy and quite profitable. And then as these restaurants got filled, and it got more competitive and less traffic, they had to get their menu prices up. I personally just think they did as good a job as they can, but a lot of them overshot because we went into a deflationary period not long after that. And I think that most restaurants today aren't in a position where they want to lower their menu prices. They've not only had the increased food cost, they've had labor issues. They've had insurance up a good bit, a lot of leases up. And I think there's a risk in lowering your prices and not doing any more volume. And I think that what we'll see is continued promotional activity, which has increased. And I think over time, people get used to those prices, and I don't see people raising menu prices right now. And I think we're heading into a better period of time. I do feel though that the lower end, unfortunately, is struggling. And we see that not just in our foodservice business, but really all of the businesses we're in. It's -- even if you look at QSR, which we don't do a lot of, but we do a fairly brisk QSR business the higher end is doing well. People like a Shake Shack or Raising Cane's or Wingstop. But when you get to the ones that are more attractive to the lower income, they're struggling. We see the same thing in casual dining, where that's happening. Hard to tell with -- we always get a good look with the consumer because we do so much of the impulse by product that goes into retail that's at the cash registers. It's hard for us to tell at this point where that's at because Easter was so late. So the shopping season isn't really -- we don't have good enough numbers there to see. But that's always a big sign for us because it's a direct reflection of traffic.

Yes, that's inching in the right direction. Is encouraging [indiscernible] moving in.

It is very encouraging.

It seems like a lot of headwinds that have been talked about for the past 6 months are hopefully subsiding, which is a net positive.

These are always hard years for us to tell every 4 years. First of all, typically, business goes down a good bit during the Olympics. So whatever level you're at, it tends to go down from there because people are glued to the TVs. And we didn't see that. And I think that part of the reason for that is it used to be -- you're going to get food at home, you're going to go get it or you're going to get pizza, maybe Chinese delivered. Now there's so many options. So the third-party delivery did real well through that period of time. And the election is always tough too. Same reason, people glued to their TVs, and we didn't see an issue there, and we've seen it really tick up since then. So some real positives.

Encouraging. And for a brief moment, I just wanted to touch on that political backdrop because it has been very top of mind over the past 4 weeks or so or obviously a lot more than that. But under a new administration, there are a lot of concerns that are talked about, some are valid for our industry, many are not. But does it cross your mind or how much time do you spend thinking about whether it's immigration or tariffs or taxes or any of these things impact how you run your business or what might impact your business?

I would say I think about it almost zero.

You're going to say all the time. So that's encouraging. I mean, there's no -- I mean, people talk about imports of products. I mean, is there a major concern in terms of -- I guess, you would just pass that along to your consumer.

Well, we would. I don't see it impacting food. I mean, obviously, there's talk of that. But I really don't see that. And then with what we import a lot of it when there's tariffs put in place, the governments just subsidize it because it's food. And it's -- once you've produced it, you got to move it. So they're going to move it and I don't see this real issue.

I know you're a fiscal company with a June year-end. But as you think about from a calendar perspective or over the next 12 months, what would you say you're most excited about in terms of improvements to your business? I'm sure you're entering each year thinking that there are some good things coming or whether it's internal or whatnot, sales or margins. What are you most excited about?

I'll make a couple comments, and then I'll turn that to Pat. But I think that our 2 recent acquisitions we were excited about. We think that -- well, the early reports from them are good. They're doing really well. We're finding the labor market to be much better. We're attracting a lot of salespeople, which always helps us. And it appears as if there's a possibility that the economy is going to get better, and that always helps us discretionary income is what we live on. And I think that will go fine. I'll turn it to you, Pat, if you have...

Yes. I mean, I would absolutely agree about the 2 recent acquisitions. We have a lot of work to do there, but it's very early days, but very excited about how both of them are performing. And then when I think about, yes, the next 12 months, we still have a very strong sales funnel, both on chain accounts, national accounts. And when we look at convenience, we put a laser focus on independent accounts with our sales teams there. And so that's all developing as we speak, and we continue to think we'll see some really nice opportunities there.

George, I think I'd like to hold your opinion in high regard, and you've been in the industry. They listen to your opinion.

Yes.

I think they hold in high regard. Having been in the industry for a while, I mean we think is the greatest misunderstanding when you're sitting in investor meetings that people just don't get a chance to peel back the onion and truly understand whether it's a positive or negative, but just things that you're surprised that people don't fully get?

With the industry or with our company?

Sure.

It's always interesting when people ask you what you do for a living and you tell them and most people never really think about how food gets to a restaurant. And a restaurant is a complex business. We ate last night at Aver, just amazing to watch what's going on and how -- they just get it out quick and they're packed and they're managing the crowd, it's always amazing. I think with our company, we're in so many different channels. I think people look at us as being complex, and we are, but we're not as complex as what we appear to be. They're very separate businesses, but there's some commonality in the distribution part of it, but the equipment is different, the management of it is quite different. But there's enough overlap, where it really makes sense for it to be together. And then I think EBITDA margins are always something that people look at our business and they're like, God, it's such a low margin business, and it -- we don't look at it that way. We look more like what percentage of those gross profit dollars could make the way to the bottom line. It's nice at a cocktail party to say, we're a $60 billion company, but we're not, right? I mean, so much of our revenues are a pass-through of cost of goods. And I think that makes us confusing. Because it looks like a little mess up and you're really going to have some severe financial issues. And I even dealt with this with our private equity firm at one time was our primary owner. And said, well, good, you lose a point in EBITDA margin, and you're really in bad shape. Well, if you look at that impact on our gross profit, it's just huge. It would be such -- you would have to mess up so bad for that to happen because you're really talking about 20% decline. And I think that's something that people often don't understand.

And Jeff, I was going to jump in a little bit, too, just because you brought it up in the intro when you started talking about all the different channels that we service, whether it's an airport, travel area or it's a restaurant or it's a pizzeria or it's a convenience store, value stores. It goes on and on. So I think one of the things that people don't maybe fully understand is just how many different ways we touch the consumer at all different economic levels. So just -- we did this at Investor Day, I don't know if you remember, but we walked you through a week of a person's activities and whether it's a college or university or all these different places that we're interacting with the consumer.

All right, it brings me to a question around foodservice distribution more broadly as we focus more on your business. The resilience of the industry. I mean, obviously, in varying macro environment, just over the past few years, we've seen tremendous volatility. How do you think about that resilience in terms of maybe people tend to just look at you versus your 2 largest peers, which the primary differences between yourself and your largest peers. What those differences are and maybe how you view this business more broadly and bear any economic environments?

Yes. I would say the difference is not as much as you would think within foodservice because we do so many other things. And then within foodservice, we don't have a focus on health care, either long term or acute. We have very little focus unless it's an independent on the hotel business or contract feeding, and those are big parts of the business. We're really focused on restaurants and highly on independent restaurants. And I think people look at some of the things we do. I mean, I have own personal friends to say, why are you doing that? But example would be that we overlap a great deal. And we look very closely at market share and how we get it. But we have markets and I'll use an example would be Greenville, South Carolina, where we have our largest and our fourth largest company or both there and they both do about equal amounts of business. So what we get, and I'm talking about this because it's going to look this way with our Cheney acquisition. So we looked at what would it look like if we combined and did them all out of one of those distribution centers. Well, one stock is 13,000 items and one stock 16,000 items and they didn't have 1,000 items that matched up. So it's a different customer base. It's -- and it's a different offering. And where you get into our Core-Mark business or you get into our Vistar business and we can swap things around and we can buy somebody and absorb it and put them in. The businesses are that different. Now you're putting food on trucks and you're delivering it, probably that's about the extent of it. Yet, in our Core-Mark business, which is a fantastic company, they don't have the cooler and freezer space for a convenience store that is -- has a serious commitment to foodservice. So -- a friend of mine who's -- our sons went to the same school, he was in Pennsylvania, and he saw a Core-Mark truck and a Performance Foodservice truck like sitting next to each other at a convenience store, it looks very illogical, right? It is very logical and good part of our future is having both those companies in there making those deliveries. So I think there's just -- it's like any business. It's a lot more complicated when you get below the surface, but it's an interesting business.

You mentioned market share. I think if investors look at the segment and again, with three big players, they look at the market share that the three command, which -- and clearly accentuated through COVID. But the big three, I would call it still relatively modest market share. I think it's 35% or so, sub-40%. So how do you -- what do you think that trend is going over the next 5 or 10 years versus where it's been over the past 5 or 10? Because again, most people would think, oh, this is going to quickly continue to accelerate as more players struggle.

Well, I think that it will continue to consolidate. I think that, that's in the cards. It's normal, actually. But if you follow the history of most industries, it's taken a lot longer in foodservice than It is, say, inconvenience or in the businesses that Vistar is in. And I think it's just because of the independent restaurateur and they want to be unique and they want to have their own product, hence having 16,000 items and 13,000 in one that only 1,000 match up. And I would put it this way. If your wife found a great blue cheese dressing, she would tell her friends or relatives, you've got to try this, it's great. If a restaurateur does, he wants you to think you're in the back room making it, number one. And number two, if you're a salesperson and you sold them on that product, you know better than go down the street and get the same product to a competitor. So hence, you end up, you have a warehouse with 20 different blue cheese dressings in it. That's the complications of the business. But that's what also makes it tick, and all of us have different ways in which we satisfy the need to go out to eat. But most of us want to have something that's unique.

Yes. I think most investors we talk to tend to think of growth in terms of adding new accounts or M&A, which are both big parts of your business. But we often think of the greatest opportunity is growing share with your existing customers, presumably, you're already making deliveries there. So how do you think about your current penetration with chains or independents, and that opportunity potentially to grow that existing customer business?

Well, Pat mentioned it this morning that there's a way to grow them within your existing customers from a profitability standpoint. You -- a lot of times what you need to do is you need to get them to change from the competitors' product to your product. And there's a lot of work involved with that. Typically, they're not going to do it without testing the product first. It's a big part of our business and it's -- and all it takes is one customer to say, oh my god what happened to your cheese or what happened to your dressing. It's not the same. They'll switch back. They'll freak out and switch back. I think that's the hardest part of our business is penetrating an account beyond what you currently have. Once again, that doesn't exist per se in our Core-Mark or our Vistar business because it's not ingredient driven.

I presume there are ways to incentivize structure in place to incentivize salespeople heavily further push your product and take market share?

Yes. I mean we -- our branded product, you get independent restaurants is 53% of our business, and we incent them fairly heavy there. Right now, we're incenting beyond normal compensation to get new accounts because for the most part at the account level, they're not growing. And to Patrick's point, being a good finance person, that's not what's going to hit the -- that same amount of business within existing customers would be much better. You got to have the blend of both.

Patrick, you're a good finance person [indiscernible].

[indiscernible].

As I think about -- you mentioned the salespeople earlier, and I know that's a hot topic in the industry lately. It seems like salespeople are key to driving independent sales growth at least. And compensation comes up a lot in terms of a big driver of what keeps a sales force or it gets turnover. So can you just talk about your compensation structure and what you've seen in terms of sales force? I think you guys are growing your sales force pretty aggressively. Some metrics around what you're growing and where you think that growth is coming from?

I think there's probably a lot of different ways you can compensate and be successful. But I think the biggest key is just consistency that they know how they're going to get paid. They can count on it. As soon as they're done putting an order in, they know exactly how much money they made on that order. That's kind of how we're driven. We look for people that want to write their own paycheck and they're not waiting for somebody sitting in an office in Richmond to give them their 3% raise for the year. They want to go out and get it themselves. And I think that most people that tell you they're not real money motivated, probably aren't telling you the entire truth, right? Most people are -- and I think you have type of system that gives them the ability to use their talent to make what they want to make. And that's what fits the type of people that we have, and we search out those type of people.

So what's a reasonable rate of growth when you think about your sales force on a regular basis in terms of hiring and how that translates into ultimate sale growth?

Yes. Well, those decisions are made at each one of the opcos, but obviously, we do as much as we can do to influence. We like where we're at now, about 6% growth in people that should produce better growth than we have now, but we understand that in a negative environment, which, quite frankly, we've only ever dealt with twice in our industry. And since they've been keeping numbers, that was the -- great recession and the early period of COVID. Do you want to comment on that?

Yes. I mean I think you kind of already said, but it's just the industry is down what we're saying like 3% or something, but we're adding 6% sales people. We're seeing growth of cases after last quarter of 4.3% of independent organic. So if the industry moderates back to even 0, we would be well higher in the single digits -- high single digits. So I mean, I feel really good about where we are given the environment that we're up against.

Yes. On the inflation and deflation come up a lot. We went through a period of tremendous inflation. We actually saw a period of brief deflation. We seem to maybe be more leveling off. But if you could just talk about maybe the durability of your business because a lot of investors say, well, I can't own a distributor when there's tremendous inflation or tremendous deflation, but it seems like you walk them through it, and it's like actually doesn't seem to impact their business as much as you think. So in terms of which environment is preferential or the swings up and down, how do you think about your growth?

I'm going to have Pat address it, and then I'll probably make a couple of comments.

Absolutely. So I mean, you're right, we've seen both really recently, right? We saw high inflation. And then shortly after that, we saw deflation in foodservice. And then what we've seen most recently, like we exited last quarter at 5% overall total company. Foodservice was a little higher than what we expected, but that was just because of a couple of commodities, and those have moderated. To your question of how do I invest in the company where we're seeing all these swings? What I would point to is if you look at how we performed even in a high inflationary or in a deflationary environment, we continue to deliver really strong results. And what we see going forward now is a much more normalized environment where we're going to see low single digits in Foodservice and Vistar and maybe slightly higher in convenience, but that just has to do with their product mix.

And if you look at the impact on us as a company, first of all, we've got a little over 75% of our business that's contracted, dollar sales. So that's based off the cost of goods, so we have no risk, whatsoever. When you get to our foodservice sales people, we give them a tremendous amount of autonomy as to how they price, but we also give them a tremendous amount of information. So if they price in either inflation or a deflationary period of time, if they're putting in pricing that's going to reduce their income, they'll be shown that immediately, and they tend not to like that. Now there are times in different competitive situations that they may reduce pricing, and it's fine. That's their decision. But for the most part, our people understand you got to be fair. You got to make sure that the product satisfies their need. We used to always encourage them to have their customers get the price up -- get their menu prices up. But I think what happened there is part of the sales issue just because they raise prices at a time that we turn to deflation. But our salespeople, if they're doing their job right and most them are, they're real transparent with their customer, and they're working with the customer based on their menu prices and try to stay ahead and try to encourage where they need to go up or what would be a good special. And it's just that ability for them to understand the business, take the information that is given and get it to the customer in the right way and keep that customer loyal and growing. So we don't really worry about how it impacts our company. We worry more about how the pricing impacts our customer.

Presumably a low single-digit environment would be the best scenario possible?

Absolutely. Yes, absolutely.

That's great. And you mentioned recent acquisitions and things you were excited about for the next 12 months. It seems like you've had an uptick in M&A, both your convenience store channel with Core-Mark and traditional foodservice. I think you're referring to Cheney and Jose Santiago. Maybe just talk a little bit about the thought process around that and how the integration is going, the synergies that you generate from that?

Well, M&A is a big part. It's an important part of what we do. Right now, our preference would be to get our debt levels under the 3.5. We've given guidance of 2.5 to 3.5. Fortunately, we paid down debt quick. But we always have to be opportunistic from an M&A standpoint. And if we decided we weren't going to be working on M&A, that engine would shut down pretty quick. So we're always working on it. We always have a preference as to when we would see it happen, but we'll never walk away from an opportunity that we know is right for the long term of the company. But we'll also never make one because we haven't had one in a while and force it. So that's kind of how we look at M&A. But we have a great deal of activity right now. And -- like I said, our preference would be that it happened later than sooner, but it's an important part of what we do.

And I'll just add, just in terms of integration related to Cheney or Jose Santiago and just what we've seen recently out of them, it's going extremely well. I mean they're both incredibly strong acquisitions. They have great sales teams, great management teams. And it's early, but everything we model is coming as we expected or better.

That's great. The -- as you talk about when it comes, you got to take advantage of the opportunities. So -- are there particular segments that are in the back of your mind or whether it's products or geographies that you're focused on? And how do you think about valuing those? I know you often talk the multiples being paid and -- versus buyers have a different perspective.

Well, it's something that Pat and I and Scott and Craig talk about a good bit. I don't get overly worked up about what the multiple is. I'm more concerned about what it looks like as part of our company and what that will do for our company. The only problem when you find one that you should pay a higher price for is the world knows and then anybody you're talking to it at that time, says, well, why can't I get that? Well, there's reasons that they can't. So I mean we've done acquisitions at 5x EBITDA, and we didn't want at 13x. And ironically, if I look at the ones that we did that have been the most successful for us being Reinhart, all the way back with Roma, Core-Mark and Cheney will be in that. We've done the best where we paid the most ironically, because we know we're buying a really good company. And for different reasons that they're appealing but I don't really look that hard at a multiple of what they're currently earning that if it's accretive for us in the short term, it's great. But if it's accretive in long term and that acquisition to me long term is like 1 year or 1.5 years. It's still great, and that's how we look at it.

I think if you look at a map of distribution centers and whatnot, you guys tend to be more on the East Coast. People often talk about an opportunity to have more West Coast. Is there geographical opportunity there?

Yes. I'll explain that. We have a path that we could get national in the West through M&A. We know who they are, and they know who we are and we want to buy them and they know we want to buy them, but the timing has to be right and the pricing has to be right. Our other option in the West is we're in most of the cities, but just in the pizza -- Italian business and Hispanic, we do a lot of Hispanic business. So we pretty much stick to that. We might go out of it a little bit. Maybe bar and grill, where they got serving that type of food because we don't want to have an issue from an antitrust standpoint. We were real careful in Florida. We ran good businesses there, but they were specialty, and we were able to do a great acquisition there. So we built a new facility in Denver. We did a big addition in Phoenix. We built a new one in Houston, in Southern Louisiana. We've got one in the process now in Northern California. And at some point, we need to make those decisions. Do we just want to become a broadline distributor on our own, which is not easy, but then they've done that. You can make it happen. Or is it M&A? So that's -- and it's not like we're giving away some secret. Everybody knows what we're doing and certainly our -- the people that we would like to purchase know what we're doing. This timing, right? But we think our day will come where we'll do it one way or do it the other way.

And when you mentioned the biggest misunderstanding that you often get questions from investors, we hear it a lot as well as the EBITDA margin, which whether or not you're looking at percentages or dollars or whatnot. But I think most people say our performance is lagging by 100 or 200 basis points. I mean, it seems like you have a totally different business model. And I know earlier today, I heard you talk about peel back the onion a little bit and look at our different segments, and you won't see it the same way.

We really don't talk about very often, but I think sometimes you reach a point where it's the right thing to talk about. If you look at our different businesses, our convenience business and you compare us to our largest competitor there. I mean, we're significantly more profitable. If you look at the systems business, our largest competitor has a successful one. We have our largest convenience competitor also is a foodservice chain only business that's successful, but we're much more successful. Ours is under our Performance Foodservice. And then if you looked at our Broadline business, where we're full Broadline. We don't do as well as our largest competitor. They're somewhat in a class by themselves in the U.S. Broadline business, but bringing in Cheney, what I get from a lot of people is, Scott, that's going to be great for your EBITDA margins. Well, it is as a company, but if you took our broadline companies as a whole, they're higher than Cheney is. So it's -- I think a lot of it's in how you look at it. And then when you get to our Vistar business, I mean, it's -- I can't find a food distributor that has the ability to put that percentage of gross profit dollars to the bottom line. They do better than anyone I see out there. So that's who we are. And then what you get and the thing, and I think is where you really got to be careful is, well, you can't -- you shouldn't do any more convenience acquisitions because that's going to lower your EBITDA margin. Well, it's Scott McPherson got a great acquisition for us in convenience, we do it. If it has the right return on capital, has the right percentage of the gross profit that we can make -- take to that bottom line, we'll do it. We'll do what's right for the business.

And you mentioned, I think, to your independent customers, your private label product is north of 50% of the sales there.

It's 53%.

That sounds like a big opportunity, especially in a tougher macro environment to push a product that you make a higher margin, customers pay less for it. Is that an opportunity to further push that? Or you don't want to get much higher than where it is today?

Well, we have a great emphasis on our brand. We don't deemphasize the national brand either. So I think it's the product that we put together, and I think we earn it. I will say that you'll see our percentage of our brand go down because Cheney is only 18%. And Jose Santiago is far less than that. Cheney has some supplier relationships because of some of the uniqueness of the market. There's 2 people that in the commercial side of it that do the bulk of the business. So you're with one or you're with the other to a degree. So they've been able to do some good deals that we're not going to disrupt. And then -- but we could see it doubling in brand percentage. And then with Jose Santiago there's a Rule 75. Is that right? In Puerto Rico, where you have exclusivity on a brand in your channel and no one else can have that product other than yourself. So they have a lot of that, and we're not going to disrupt that, of course. I mean that's I guess from a sales standpoint, in some ways, it's the same as having your own brand, right?

My last question was just -- in the final minute is just digital. I know a lot of people talk about how this is a distribution business and it should be all digital over time and then margins went up. You guys have often said you're not the front runner necessarily in digital, but it seems like you're moving in that direction. And where do you think your business is from a digital perspective, the biggest opportunities to go?

Well, we were late with it, and I've often said this, we really had to make decision back in the day. where we're going to spend our money, and we're going to spend a lot of money in digital because it's very expensive to do that or on people. And we elected to do with people. But now we're doing both. And we feel like we were able to do it at -- with a lot less people and a lot less cost because it's been out there for a while, and we knew the pitfalls, and we feel like we've got something really good, put together, we're seeing the percentage of our customers that are placing their own orders digitally climb. I'd like to think it's climbing at the rate in which the customers want it, that they're adopting it at the rate they want it, but it's a big part of our future.

Great. I think we've exhausted the allotted time, but we want to thank Performance Food Group, and George and Patrick and team for all joining us. Hopefully, you have a good day of meetings. And thank you, everyone, for joining us.

Thank you.

Thank you.