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

Good morning, everyone. Thank you for joining us. I hope everyone had a chance to grab breakfast in the room, and hello to everyone out on the webcast. My name is Jeff Bernstein, and I'm the restaurant and food service distribution analyst here at Barclays. To be clear, I do have plans to retire at the end of actually this month after 25-plus years in a row. So I'm officially the outgoing analyst with the next analyst to be named hopefully shortly. But I did want to welcome all to day 3 of the 19th Annual Global Consumer Conference. We have had 14 restaurant and food service distribution companies here with us between Tuesday, Wednesday, Thursday, we had [ BJ's Cheesecake ] and [ Kura ] on Tuesday. [ Bloom Dyne, First Watch Restaurant Brands, Cisco], Texas Roadhouse, Wendy's. U.S. Foods, Yum! and Wingstop yesterday, and we are excited to have one company today, which is Performance Food Group. So we hope you have found the conference a good use of time. And at this point, I would love to introduce our final presenting company for the day, at least for me, which is Performance Food Group. So with us this morning from Richmond, Virginia, we have got Scott McPherson to my immediate right, he's the CEO; and Patrick Hatcher to his right, who is the CFO. By way of background, for those not familiar -- bless you. Performance Food Group is one of the largest food service distributors in North America. They have 150-plus locations. They deliver food and related products to 350,000 or more locations, including independent and chain restaurants, schools, business and industry locations, vending and office coffee service distributors, retailers, convenience stores and theaters. So clearly, a very broad swath of food service distribution. So we want to thank Performance Food Group for joining us this morning. I've got a slew of questions on the broader consumer and industry and then lots of specifics on Performance Food Group. So with that said, again, we want to thank Performance Food Group, specifically Scott and Patrick, and Bill in the front row. And with that said, we will kick it off. So thank you again.

Very good. Thank you.

So we wanted to start with just a few higher-level questions about the consumer since you see presumably a lot of them across the country. Maybe you could start by just providing your thoughts on the state of the food away-from-home operating environment more broadly.

Yes. Certainly in the consumer -- the consumer has been, I'd say, on a little bit of a roller coaster over the last handful of years. When you think about tariffs and inflation and fuel price. But for us, I think the consumer has been very resilient. And we -- we have a great vantage point on that. We obviously look at [ Black Box ] when we think about the consumer, and that traffic has been pressured, but fairly consistently. We look at [ SERCONA ] data, which is all transaction data, which gives us really good insight. And then obviously, we have a great handle on the independent consumer as well. For us, we really focus on the controllables. And for us, it's been growing share and really excited to be in all 3 of our segments growing share as we actually did this year and have really good momentum. And as far as the broader food away-from-home space, I think it's been a bit of an evolution. I mean food away from home has been growing for a couple of decades. Certainly, coming out of COVID, there was -- there was some interesting trends. I mean you saw coming out of COVID, food inflation went kind of crazy. And so we saw menu prices kind of hold. And so coming out of COVID, the consumer was flooding to restaurants. And over time, those menu prices crept up and food away from home got a little pricey. And now I think we've kind of reached that equilibrium. And I think that's really good for us, and we're looking forward to the future.

Being that we're at a staples conference, well, staple and discretionary. Now we're proud to have merged, but there are a lot of staple peers, on the other side of this wall who would say that food at home is prone to be taking share. We have had a thesis for decades, the food away from home, like you said, continues to take share. So I'm just wondering, do you feel like the more recent restaurant industry has returned to a little bit more aggressive value will give -- allow the food away from home segment to retain the upper hand? How do you believe the rest industry is positioned as they do battle food at home?

Sure. Well, I think you hit the key word. I think it's value. I think when you have a pressured consumer, they're looking for value options, and I think about the food away from home space, I think about the independent restaurant, which, from our perspective, has been outperforming for some time. And I think the reason they've been able to accomplish that is really their flexibility. I mean they can shift on a dime whether it be shifting their menu, shifting to menu pricing and the offer that they have. So they can create value. They really understand their customer well. And I think that's how they've been very successful. We see it in the convenience store space as well, where we see shifts in how people are pricing in store and the food offer that we see in convenience and that we bring to convenience that we think brings great value to the consumer. So I feel really good about the food away from home space, being able to fight for that consumer share of wallet.

As you sit through investor meetings, and you will do lots of those today. But in recent months, what questions do you get from investors that will either surprised you that you're getting the question or surprise you that you're not getting the question that perhaps they should be asking?

Sure. Pat, do you want to --

Jeff [indiscernible] jump in. First of all, I just want to say congratulations on your retirement. It's been a pleasure to work with you.

Thank you very much.

But just I think one of the questions we get a lot of times that we is how we get compared and people think of us just as a large food service distributor. But in reality, and we talked a little bit about this at Investor Day, we actually have 3 distinctive segments, food service, obviously, by far, our largest and most important in the company, but we also have a very large segment in convenience. And in your intro, you've talked about how we could cover convenience stores and then specialty covers a broad array of channels, including theater. And we think it sets a powerful diversification and that gives us such a broad footprint in terms of food away from home. Almost -- I said it's a Staples conference. But in this sense, we're talking about food away from home. And since we are a staple in -- or we're similar to one and that everyone has to eat, right? And we cover such a broad food away-from-home category. And then also, we -- our customers are public and private restaurants, public and private convenience stores. So we just think it's a really good diversification story.

Very durable.

Yes. Jeff, one of the things I told you before we started was as I look back over the last 4 years and how the company has performed, I think about this last year, convenience had a great year -- the year before that, foodservice really outperformed. And the year before that, it was specialty. And I think that just shows over the course of 3 years where the consumer has been pressured that they tend to shift their behaviors and we've been able to really capture the best part of that in our 3 segments.

One question we get a lot, although it is -- has its ups and downs, is around GLP-1s as people think about the future of food away from home. It feels like this is a more -- a greater risk than we've seen in past diet plans or whatnot because it is more readily available, and it is becoming lower cost and it just seems like it's gaining more and more traction. How do you see that impacting -- or are operators asking you for help and changing their menu because of it? Or do you think in a couple of years, we'll be talking about a different strategy?

I think as GLP-1 started to emerge, it's probably been over a year ago when you started to hear about it actively. I think everybody thought maybe it was a trend. I don't think it's a trend. I think it's a real shift in behavior. And we've seen that across all 3 of our segments. And I think about the word I hear the most is protein, probably secondly is around fresh food. But the one thing that folks that are using GLP-1 behaviorally indulgence hasn't gone away either. And I think that's one of the things about the independent restaurant is their flexibility. We've seen them already shift to more protein-focused menus, to make sure that they have dessert options on the menu fresh food, they can adapt portion size really easily. And we see it in the convenience space, too. If you go in convenience stores now, you see whole sections that are protein focused. So I think across the food away-from-home space for decades, foot away from home has been adapting to consumer behavior. And really, to me, this is just a shift in consumer behavior. People are not -- they're not quitting consuming food at all. So I think it's really good for us. People want to be out and we're in an industry that can adapt to that change.

Yes. And just lastly, from a high-level perspective, as we wrap up on calendar '26, which is hard to believe. But looking to calendar '27, what are you most excited about as we think of the next year? I mean clearly, you're relatively new to the CEO role, and next calendar year have a full year? Like is there anything in particular that you're most excited about?

Yes. I think what's most important in any business is just momentum. And for us to exit this last year and enter calendar fiscal 2027 for us with great top line momentum across all 3 segments with really solid margin momentum. We've talked about our procurement initiative that we have going, how we're shifting mix and convenience by selling food service. So I feel really good about the top half of the income statement. And then on the bottom half, we've talked a lot about uses of technology, and I feel really good about the initiatives that we have going on around fleet utilization, fleet efficiency in our warehouse as well. So we feel great about how the company is positioned for 2027.

We talked about the resilience of the food service model, like you said, different segments outperforming in different years. Like what do you see are the primary differences between yourself and your largest peers and then just as importantly, between the whole rest of the industry that is so much more fragmented?

Yes. I think the largest peers, we all have differences in how we go to market. Certainly, I think our investment in our sales organization, the consistency that we've had there from a compensation structure standpoint, and then I think, structurally, we give our salespeople full authority to price, product selection. I think they would tell you one of our biggest levers is our exclusive brands. And we use that across all the food service, and it's now spilling into convenience and specialty as well. So we think we have really good levers in the independent space. I look at the chain space in foodservice and feel like we've done a great job optimizing that portfolio. We talked about some new wins in that space that will come on second half of the year kind of Q3, Q4. So gaining share there as well. So I think what we've been doing is resonated and it is a fragmented space. So certainly part of our growth, Algo will be M&A and has been in the past, and that pipeline remains robust.

And you mentioned M&A, which gets talked about a lot. But when I think about just broader market share. I think investors look at this as a roll-up story where the big keep getting bigger. But I'm just reminded of the fact that the big 3 still have collective. I mean as well as you have differences, you collectively pull in the same direction and you only have 35%, 37% market share between the 3 of you. So where do you expect that trend to go over time? And it seems like even if the industry of restaurants was relatively flat, there's just an opportunity for you guys to continue to gain market share.

You want me to jump in?

Yes, go ahead.

Well, it's interesting. When we look at how our independent case growth has been going specifically, and we think there's ample room for market share gains. And we get this question a lot, like you guys are growing market share, where you're taking that from? I mean if you look at the industry, we talked about the big 3, but then there's lots of large regionals and even below that, there's lots of specialty distributors. So we don't really know where the market share gains come from, but we have been consistently quarter after quarter generating very consistent market share gains. And even as we exited the last quarter -- the last 2 quarters really how -- it's a little exciting for us is that we started to see more penetration. Most of our independent case growth was coming from new account growth. But then the last 2 quarters, we actually saw relatively around 100 basis points of that growth. So like, call it 5.8% was total independent case growth, about 100 basis points that came from penetration where we're selling more to our current base. And that's -- that, again, shows us taking market share with our current customers and also gaining market share by expanding our customer base.

Yes, one other add there is just compared to the other 3. I mean, we have a lot of white space. We -- obviously, our acquisition in Florida, we had a lot of white space in Florida. We only have 3 distribution centers. A couple of those were subscale in Florida. So that really filled out Florida and the Carolinas. And then obviously, in the West, we have a lot of white space. That's our fastest-growing region. We continue to look for opportunity in that market. But beyond just the organic, we certainly have some M&A opportunity and some areas that we can fill in geography.

So first and foremost on the organic side, as we think about your business before M&A. Like how do you think about the balance of further penetrating existing accounts versus adding new accounts? And maybe just because we talk about a lot maybe share your mix of chain versus independent? How do you think about your mix of business between -- I mean we look at all the big chains. But often times, we're reminded that they might have mediocre results of some change, but then the independents are doing so much better. So how do you think about your business?

Yes. Right now, our mix is -- we're a little higher than 40% on independent. That has been growing consistently and that's where we continue to gain more share. But right now, we're 60-40-ish mix chain and independent I'm really comfortable with that. I think that's a good blend, somewhere in that 50-50 space. I would say we're very similar in convenience as well. As I think about penetration, I mean, obviously, that's the most profitable thing to do is to sell more to every unit that we have. When you have a challenging macro, that's tough. And like Patrick just said it, it was great to see us have almost 100 basis points of penetration over the last couple of quarters. I think one of the big game changers there over time is going to be technology. And we've invested a lot of time and effort and resources into our sales facing and customer-facing tools. And I think the AI enablement that we've embedded there now is really important in us being able to gain share within -- or share of wallet, essentially share within a restaurant. And I think those have started to come to bear. I think there's a long road map there to continue to improve, but I really look for that technology to play a big role and obviously, at the end of the day, though, it's our investment in our salespeople, and that's something that we're really proud of.

Right. And then thinking about your different business lines, again, foodservice distribution to restaurants is the big one. It gets the most attention. Your confidence in that kind of mid-single-digit independent case growth and then how do you reverse the negative trend with national accounts? Is there things you could do? Or is that just the broader macro that's taking its toll?

Yes. The 6% gets talked about a lot. That's kind of our internal target has been for decades. The way we've gotten there the last few years, I'd say, has been the hard way. It's just net new accounts. When the same-store growth is not there, I'm really proud of the sales organization's ability to continue to gain net new and gained some penetration. And last year, we finished at 5.9% and change. I was frustrated. We were like a take away from getting to finish last quarter at 5.8%. So certainly, internally, that's always our target and something that we continue to strive for. And our salespeople, if you ask them, internally like what are you shooting for? They always want to grow 6% or more. That's just culturally how we think about it. The second half of your question, I'm sorry?

Yes. Just more on the national account side, it's a challenge for all of the big distributors, and that's tough when it's 60% of your business.

It is. And we had -- I'd say over the last couple of years, we did a great job of what I'd say, optimizing our portfolio. And so we've partnered with some of the more progressive foodservice players in the space. Certainly, same-store comps in chain has not been great. It's not been quite as good as independent. But bringing on partners like [ Jersey Mike's ] here coming this year, who is doing a great job from a same-store comp standpoint. And we have a number of other progressive retail groups in the foodservice space. So we feel good about the portfolio we have today. If the macro gets better, we feel really good about it.

We're all hoping for that.

Yes. So am I.

So when you talk about 5.8%, 5.9%, I think if you just suddenly change it from 6% to mid-single digit, you'd be able to say --