Performance Food Group Co Q3 FY2021 Earnings Call

Good day, and welcome to PFG's Fiscal Year Q3 2021 Earnings Conference Call. I would now like to turn the call over to Bill Marshall, Vice President, Investor Relations for PFG. Please go ahead, sir.

Thank you, Laurie, and good morning. We're here with George Holm, PFG's CEO; and Jim Hope, PFG's CFO. We issued a press release regarding our 2021 fiscal third quarter and first 9 months results this morning, which can be found in the Investor Relations section of our website at pfgc.com. During our call today, unless otherwise stated, we are comparing results to the same period in our 2020 fiscal third quarter and first 9 months.

Thanks, Bill. Good morning, everyone, and thank you for joining our call today. It is my pleasure to discuss PFG's third quarter financial results with you this morning. It is an exciting time for our company and industry with increasing confidence that recovery is taking hold. We're excited to see more and more of our business grow above and beyond 2019 levels. As we reflect upon what the past 12 months have brought, I could not be more pleased with how far our organization has come and how well we have responded to the market challenges. Over the past year, we have made strategic investments in our business despite a tough operating environment, including retaining our sales force. I am pleased to say that these investments have paid off, reflected in market share gains, particularly in the independent restaurant business and sales growth. The progress we made would not be possible without the strong partnerships with our customers and suppliers and, of course, our service-minded associates. Although it has been a difficult time for restaurants, many of them have not only survived, but are looking forward to a stronger business in the months and years ahead. The resilience of the restaurant industry has been something to watch and we are proud of the role we play in the food supply chain. Let's begin by discussing some of the dynamics of our third fiscal quarter. As you know, we lapped the Reinhart acquisition in January, and we're comparing against a very strong start to calendar 2020. Also, several of our markets, particularly in Texas and other areas of the Central U.S. experienced severe winter weather, which temporarily shut down the ability to ship product and kept many individuals at home. While this created a difficult February, the restaurant business picked up significantly in March to finish the quarter strong. Also, while we are beginning to see some improving trends at Vistar, many of the channels they serve are still under pressure, but we do expect those channels to eventually move into recovery mode. Nonetheless, we posted a record quarter with over $7.2 billion of total net sales.

Thank you, George, and good morning, everyone. Before I review our results for the third fiscal quarter, I'd like to discuss some of the larger financial items impacting our business. As George mentioned, with our strong sales recovery, we have also seen the impact of higher labor costs as we rebuild our organization and are impacted by the effects of a tight market, particularly for drivers. These items are certainly not unique to PFG nor are they new to our industry. Driver supply and wage inflation has impacted distribution businesses for many years. However, today, there is demand for these workers from businesses around the country who are building their workforce up to pre-pandemic levels. We also continue to support our sales force as we have throughout the pandemic and with better sales results come higher compensation expense, a trade-off we are more than happy to make. Last year, we also recorded a bonus reversal as our organization has continued to perform well through the pandemic, we have now been accruing bonus expense since the beginning of the fiscal year, which produces a contrasting year-over-year operating expense comparison in the most recent quarter. Specifically in the third quarter of 2021, we had approximately $30 million of bonus expense compared to a $32 million benefit in the year-ago period. We believe that supporting a strong workforce is an important element of our growth strategy and a necessary ingredient to retain the market share we have picked up. We will remain diligent around costs, particularly those that did not impact our customer-facing activities. Still, we would expect the workforce rebuilding efforts to support sales results at or above 2019 levels in the coming quarters. We're proud of how our organization has managed the labor situation and believe it has positioned PFG for long-term success. I'd also like to address our working capital and liquidity position. We exited the fiscal third quarter with a strong balance sheet.

Our first question comes from the line of John Heinbockel of Guggenheim.

George, could you provide some insights on the growth in the independent sector? Specifically, I'm interested in the rise in new accounts and the performance of existing accounts. Are existing accounts showing an increase in the number of lines per stop, and has there been any recovery in the volume per line?

Yes. Well, if you look at our independent growth, first of all, if you look at April and you look at a 2-year stack, we're actually growing much over our normal levels. And I think a lot of that was that we were in good shape going into the pandemic, and I think we did a good job of picking up accounts during the pandemic, particularly for some reason, early in the pandemic. Our growth, if you had to kind of look at where it's been coming from, certainly, the greatest strength is in existing accounts with both growth in the number of lines and growth in the number of cases and ironically, growth in the number of cases per line item. That may have something to do with heavy takeout and the reduction in menus; it's kind of hard to tell. We're doing well with net new accounts. I think that is very much a market-by-market development. We feel that there's been significantly more accounts closed in the Northeast than in the rest of the country. And then in parts of the West, we see more closures as well, particularly in California. So it really varies by market, but we're just really pleased with how we're doing at the account level. That is what's really driving our growth.

And I know with COVID, one of the things you learn, right is that your salespeople have more capacity. But if you think about the recovery progressing faster than you thought, how comfortable are you with the capacity they have? And do you feel a need here in the near term to step up sales force hiring?

We've already stepped up the sales force hiring. We stepped it up a good bit in February and in March. We're at all-time highs in sales per salesperson. We like that because they make a better income and it makes for more loyal salespeople, and it's just good all around. But we do recognize that we have an opportunity to grow faster than we have in the past, and we want to make sure we have the people to support that growth.

So, typically, you would see a sales force growth of about 3% to 4%. Are we returning to that level, or are we planning to exceed it?

No, it's back to that level.

Your next question comes from the line of Alex Slagle of Jefferies.

I wanted to follow up on the independent business. And if you could kind of talk to how you think you're gaining wallet share with the existing customers and perhaps really thoughts on their propensity to either trim or expand the number of distributors they buy from as supply chain challenges and driver shortages could be to some smaller distributors and suppliers may be coming up short on inventory and ability to deliver as we look forward?

As we observed last year, our sales team has been effective in acquiring new accounts and expanding our share within existing ones. However, I do have concerns that this could be a temporary trend, especially with the continued shelter-in-place situation. After 13 or 14 months of this environment, I worry that customers might revert to their previous behaviors. Given the duration, this has become their new norm. I believe we can maintain our position with these accounts, although there is a chance of competitors entering the mix. So far, we haven't experienced that, and I don't foresee any significant shifts in the marketplace.

Okay. And on Vistar, just wondering if you could comment a little bit more on some of the underlying dynamics there. And two things specifically, just curious how the supply chain issues broadly have impacted your infill rates there? And then any comments on how you're investing ahead of maybe some expected acceleration in demand in the back half of calendar '21?

Yes. Well, Vistar, obviously, has been much, much heavier impacted. It's also been heavier impacted from an inbound supply chain. Our service levels, which were typically mid- to high 90s inbound from our suppliers is actually in the 80s. It's incredible the difference. If you think about that, we haven't had anywhere near that kind of effect in our Foodservice business. But our Vistar business is a branded business, and they're mostly big CPG companies. And they've been very, very busy with retail. It's also impacted to some degree our third quarter earnings; it's typically a good quarter for Vistar, but we also have a lot of promotional activity that happens at the end of December. From our suppliers, we recognize that income in January, early February as we're selling the product. But those companies were not looking for additional volume. As they got close to the end of the calendar year, they could barely keep up with what they were producing. And as far as investing, I feel real good about Vistar, extremely good. It's been our flagship company for a long time, and I still consider it to be. Those channels will come back. I think that there's a chance that office coffee won't come back to the size it was before, if there's more work from home. And I think we need to see with theater, although there's so much product or movies that haven't been released and they keep getting delayed that we're going to get hit with blockbuster after blockbuster. And I think when people are comfortable to go back to theaters, I think the theater area is going to do real well. The other channels that we have are all doing fine, where I see great potential is that we've picked up a good bit of new value store business that actually started this week. It comes on bit by bit, I guess, but every week for about, I think, it's a 5- or 6-week period of time, it will be fully in place. That's going to be a big help for Vistar. We did have some suppliers that, albeit, kind of small, that didn't make it through this. So that will be helpful for us. And I just see nothing but opportunity. It's a great channel.

Your next question comes from the line of Edward Kelly of Wells Fargo.

I wanted to follow up on guidance, particularly regarding current trends, and understand what's included. If I look at your third quarter sales, they seem to be about 3% below pro forma 2019 sales. It appears April is showing an increase, but as we consider Q4 and account for the extra week, I'm uncertain about the implications. Your guidance, without considering the extra week, what does that suggest for Q4 compared to pro forma 2019?

Yes, it suggests a better Q4. We experienced a very strong April, and we wouldn't have mentioned it otherwise. The momentum from April gave us the confidence to provide at least a baseline guidance during a time of significant uncertainty in the market. We are committed to monitoring developments on a weekly basis, and as the quarter continues, we will keep assessing how the business is performing.

Yes. I'm going to comment a little bit more on it, but I want to take a little caution with it. As you can imagine, we spend a lot of time talking, I will give some form of guidance or not give guidance. But really, you're 5.5 weeks into it by the time we have this call. Our April was extremely strong. And you have to look at that in a lot of different ways. And people who were getting their vaccines, they were anxious to get out for a first time. The restaurants in a lot of markets are full or full to the capacity that they can be. And in my discussion with customers, they are not seeing their takeout business slow down. We are not seeing our sales of disposables for use in takeout slow down. So I think that we needed to be cautious that this could be a little bit of a positive bubble. Now that may sound strange to say when there's still markets that have restrictions. But if you think about a restaurant being at 75%, I mean how many hours a week is a restaurant above 75%, right? And I think customers today are more willing to take an earlier reservation or a later reservation than normal. The expectation level is a little bit different. And we were cautious around what we're looking at for the top line.

That's helpful. And then the other thing I wanted to ask about the top line is there potential for some negative mix components? Like if I think about your case growth relative to your sales growth, your sales growth has been outperforming. Does any of that reverse? Or does that sustain itself? I'm just curious as to how we think about modeling sales on that.

In our company, a sale varies significantly due to the large differences in case costs. We also have the added element of selling cigarettes to operate in the convenience sector, which, while profitable, yields a very low return on sales. Overall, our gross profit per case is currently at an all-time high and we are performing exceptionally well in this area. Additionally, we are seeing strong results in high case cost items, partly due to increased smoking, as people are less restricted outside of the workplace. Our cheese sales are outstanding, and our center-of-the-plate sales are making up a larger portion of our total sales than usual. As a company, we consistently monitor our gross profit per case along with our margins prior to these calls. While I won't comment specifically on the trajectory of our margins, we are very optimistic about our gross profit per case.

All right. And then just the last one for you was on the cost side. You did mention cost on the driver side and warehouse worker side. And I know you don't want to sort of say where you think EBIT margins could go over time. It does seem like they can go higher, though relative to your pro forma '19 number, just given everything that's happened. Is there anything you're seeing in the inflationary side on the costs that you think would prevent that?

I don't see anything that would hinder the improvement of EBITDA margins. However, I want to emphasize that as we move forward, our priorities are centered on enhancing profitability and increasing our return on capital, rather than solely focusing on EBITDA margins, which is not the best way to run our business. While significant changes in product mix could impact our EBITDA margin, I believe it will continue to rise under normal circumstances. If we look at our third quarter, although the EBITDA margins weren't outstanding compared to previous periods, we saw notable improvements in the Foodservice sector, particularly with broad line. Reinhart is performing exceptionally well, approaching the growth rates of Performance Foodservice. Legacy Vistar historically had the highest EBITDA margins, but it has been heavily affected recently. Regarding expenses, I do not anticipate any issues since we've proactively addressed any comp challenges as they arise. We closely monitor our competitive positioning in the market concerning comp. An increase to $15 an hour will have minimal impact on us. Currently, we can't afford excess inventory, too many drivers, or warehouse personnel. To achieve our sales and profitability goals, we need to focus on staffing. I believe that as we approach fall, attracting qualified individuals will become more manageable. There are several factors at play, but we believe we are well-positioned to attract good talent; we just need to locate them.

Your next question comes from the line of John Glass with Morgan Stanley.

My first question, these are both expense questions. My first question, Jim, is just on the OpEx line. Have you been including bonuses at this level all year, and we're just hearing about it? Or is this a catch-up to some degree? And what I'm really trying to understand is if you exclude the bonus payment, the reversal, if you will, how much is underlying OpEx growing? Are you seeing some pressure, transient pressure from that hiring? Maybe just talk about what the underlying expense trends are excluding those balances.

Yes. The first part of your question is we have been accruing at this rate all year. The difference is we ran up against the adjustment of the reversal last year in March in Q3. So that's the reason it triggers a comment. That hadn't happened until March last year. So that takes care of that question. When you think about OpEx, look, the main driver of our increase in OpEx in the quarter was an increase in labor, particularly drivers. As we'd anticipated, as volume began to recover, we needed to restaff the areas of our workforce that we had pulled back on. So if you look at personnel expense sequentially from 2Q '21, we were up in driver costs, warehouse costs, sales comp, and bonus expense. And I'd say no one item was particularly large quarter-to-quarter, but they added up to the increase you saw in 3Q '21 with the bonus. So keep in mind on that; look, we're building a cost base ahead of the sales recovery on purpose so we can take care of our customers. And if you add in Reinhart and Eby, our 3Q OpEx was below 3Q '19 OpEx. If you look at our expectations for Q4, we definitely aspire to be above 2019 sales levels fairly soon as we mentioned, and we need the workforce and the infrastructure to support that.

And could you just maybe a word on the role of inflation in the gross profit? As we start to see inflation come up, are most of your contracts sort of penny profit driven such that inflation might actually drive down gross profit even in the gross profit dollars and sales? How should we think about both margin and this more inflationary environment for you?

Yes. A significant part of our chain business may experience some margin rate erosion, but we expect to maintain our margin dollars. In our independent sector, we anticipate performing well and fully passing through any impacts. Given the current inflation rate, our margin dollar performance is typical and not an issue for us; we will handle it as we always have.

If I could ask just one final. You mentioned your vendors having challenges with their labor. What's the risk you actually can't get available inventory? Is there a risk that's actually like your fill rates become lower because of this? Have you experienced that? Or is that just something you're flagging as potential for the next couple of quarters?

Well, our fill rates are below normal rates now. And it hasn't been a big issue, whereas the biggest issue is customers, actually, that our chains, and we have 100% of the business that we have for a long time, and they'll pick up the phone and call and say, what's going on? What's happened to you? When you get out in the independent world, they're experiencing other people as well. And they know the issues that exist in the supply chain. But what I see other than if you get a place shut down because of a COVID issue, it's getting better and it will continue to get better. One thing we learned from this is that our industry was finely tuned, and we've got a lot of perishable product and we would turn the inventory extremely quick, and our suppliers were quite reliable, and we were threading the needle kind of all the time. And a real mature supply chain like that doesn't come back overnight. And I see our suppliers getting better and better. We are running higher inventory levels than before because we understand the issues they're experiencing. And they're having the same problem getting people, which, like I said, I'm just a believer that that's going to alleviate as we get into the fall. And I don't see it as a long-term problem. It's just something that, as an industry, we just have to fight our way through and get back to some sense of normalcy.

Your next question comes from the line of Lauren Silberman of Crédit Suisse.

Just a follow-up on the independent case growth piece. Are you willing to share what percentage of independent customers you're serving today relative to pre-COVID? And then if you're starting to see the appetite for new unit growth in the space increasing? Then as it relates to wallet share, how is your wallet share penetration among existing independent accounts compared to new accounts that you've brought on?

Our wallet share in existing accounts has been steadily increasing. This is likely our strongest area, with a significant net increase in new accounts among independents. We're performing slightly better than mid-single digits, which we consider a positive outcome given our current growth. I believe I may have overlooked one part of your question; if you could please remind me.

Sure. Looking at the wallet share, the penetration among existing accounts, how that compares to new accounts? So whether new independent accounts you brought on, the wallet share penetration is lower than what you're seeing with your existing customers?

Our average sale per customer is the best it's been. So we're seeing really good growth in existing customers. I really couldn't tell you how that compares to the size of our new accounts. But in totality, our bright spot is that we're selling more to existing customers.

Great. And then just another one on inflation. Can you share what you're seeing on inflation in the fourth quarter? And then what level of inflation do you feel you're comfortable to pass on to customers as you think about the potential for accelerating inflation?

Yes. No real change in the early phases of Q4 from what we've talked about. We see the continued momentum that we had in Q3 in inflation. I'm not sure I want to get into hypothetical scenarios, talking about how much inflation we can pass on, but I can tell you this. At a 3.5% level of inflation, that is not a challenge to pass on at all. Our salespeople are doing an amazing job, working with customers, helping them understand what's going on, and they can certainly do something somewhat north of that.

Yes, and those decisions are made by our salespeople. So we don't have kind of a big answer for that. It's really a whole bunch of little answers that they're out there getting every day.

Your next question comes from the line of Kelly Bania of BMO Capital.

I just wanted to clarify another point on the guidance for the fourth quarter, the $8.2 billion, I guess, which sounds like maybe a floor. Just curious if that assumes kind of the April run rate that you've seen, if that kind of continues or if you're assuming continued acceleration there? Because I guess you also had a lot of stimulus dollars in the past couple of months being pumped into the economy. So just kind of wonder if you can help us out there with all the moving pieces.

Yes. Kelly, thanks. It's Jim. I think the best way to understand the guidance in general is it's a floor. It's an at least number. And it's a floor at a time where there is, as you know, a good deal of uncertainty. There's a lot of things that will develop. Some could be positive, some could be not positive. I'm actually very encouraged and optimistic about the future. But we did provide a floor number of $8.2 billion in top line. And I think you know us well from the standpoint that we put down markers that we're very confident that we can meet or exceed. And that's why it's a floor.

That's helpful. I have another question regarding your customers. Over the past few quarters, you've mentioned various customer types and geographic locations that have performed better in the current environment, such as those in the South, or within the pizza and barbecue segments. I'm interested in an update on how those customers are managing and comparing against tougher challenges. You mentioned casual dining might be recovering somewhat, along with takeout and paper products remaining steady. Could you provide more insight into those dynamics by format and geography?

If we examine performance across different geographic regions, the Southwest is currently our strongest market, closely followed by the Southeast. In the West, where our presence is limited, pizza and Italian cuisines are doing well, though it's largely driven by the pizza segment. The Midwest follows, while the Northeast is significantly lagging. Regarding customer segments, we are pleased to report that we are gaining market share across all types of customers. In fact, our mix is probably more favorable than many in this challenging environment we've experienced over the past year. Notably, our pizza business is consistently gaining market share every month compared to previous periods, and we have not seen any decline in growth relative to 2019, even as dining options have expanded with more seating available. As for the casual dining segment, it was the last to recover but experienced unexpectedly strong growth when it did, which surprised us. However, we cannot predict whether this growth will be sustainable. The casual dining sector is performing very well, which is why we mentioned earlier that chain businesses might ultimately outpace independent ones in growth. They have significantly increased their efforts.

That's helpful. Can I squeeze one more just on inflation?

Sure.

Because just was thinking about the 3.5% number that you called out. And I was just curious if there's much difference between the Foodservice business, where there's maybe some more fresh and protein categories versus Vistar or maybe some of the price and commodity costs haven't kind of flowed through from some of the manufacturers yet? Just curious if you can talk about the differences there.

When it comes to the bottom line, there's not that much difference. The Foodservice is definitely more volatile, being more commodity-driven. Coffee is up significantly. The beans are up significantly in price. But of course, our office coffee service business is down significantly. So when that business comes back, that could have some impact. And supplies are tight in a lot of areas and that causes inflation. So I don't think we can comment for the future on inflation. I think that's very, very difficult to do right now.

Your next question comes from the line of Jeffrey Bernstein of Barclays.

Great. Two questions. First, George, you mentioned especially in Foodservice distribution, you can't have too many workers and you can't have too much inventory. But I get the sense that many of your peers don't have the capabilities and the balance sheet to invest ahead of the curve on, for example, labor and inventory like you seem to have. So I'm just wondering what have you seen in terms of closures or challenges for both your competitor distributors, presumably smaller and/or even restaurants. I'm just wondering what you think in terms of further consolidation of market share opportunity for yourselves as that sounds like a challenging environment for somebody who doesn't necessarily have the balance sheet that you might have. And then I had one follow-up.

Yes, I find it challenging to comment on competitors. Most of them appear to be doing well, and we haven't noticed many businesses closing. However, I've received calls from some individuals who feel overwhelmed by the demands of this industry. It's an incredibly tough environment right now, which suggests that there are difficulties present. Despite this, it does not necessarily imply that we will see a major reduction in competition. The current labor market is very competitive, often with more competition for labor than for customers. This situation can be particularly challenging for those who do not offer attractive compensation and benefits.

Got it. From a customer standpoint, are you observing the restaurants that have survived this far? It seems there has been more growth. What is the estimated number of account or customer closures you have seen this year compared to what the industry is reporting?

We don't have great systems to determine that. In the Metro New York area, 35% of the businesses we sold before COVID are no longer operating, whereas nationally it’s about 10%. This might be one reason why, at the unit level, existing operators are performing well due to reduced competition. Additionally, outstanding operators in every market are being contacted by landlords with empty restaurants, and they are offering attractive deals to recognized good operators, which will lead to many new openings. Most of these new establishments will be run by capable people. Certain regions, especially Florida and Texas, are experiencing significant growth and attracting new restaurateurs. Some individuals who were previously operating restaurants are now relocating to launch their new venues. It's an intriguing and thrilling time for the industry, and I believe that, on average, today's restaurant operators will be more skilled than those before COVID.

That's very encouraging. One last question just on the workforce. I've never seen that topic get so much attention on all conference calls, ramps up so quickly. Obviously, you're ramping up your . I'm just wondering what you're doing to fill those roles, whether you're inclined to pay short-term bonuses or do more over time? I'm just wondering how long maybe this lasts or whether you think you've done most of your heavy lifting from a hiring standpoint in the third quarter, and we shouldn't be hearing about this in the fiscal fourth or going into fiscal '22. Just wondering how you guys are approaching it to succeed from a hiring standpoint.

That's a complicated question. I believe we're doing everything possible to hire the right people. However, it's costly because we can't compromise on training. If we rush to get a driver on the road without proper training, one accident could end up costing far more than the training itself. The same goes for the warehouse, where mistakes can be particularly costly in terms of workers' compensation, so it's essential to invest time with our employees. We've also seen returning workers who were previously reliable warehouse employees struggle after a few days because they've been inactive for a year and may have gained weight. We need to support these individuals and be patient with them while continuing to hire. I don't see this as a long-term problem; it's certainly an issue, but not a lasting one. People generally want to work, and many of them are not currently facing the necessity to do so, which contributes to the situation.

Our next question comes from the line of Nicole Miller of Piper Sandler.

I wanted to revisit an earlier point regarding fill rates. Could you provide some details on what the averages were prior to their current levels? I believe they used to be between 80% and 90% for fulfilling restaurant requests as needed. Additionally, could you discuss the range, specifically on the lower end? How low does it go, and if the fill rate isn't quite what they require, what specific items or areas are facing more challenges?

Yes, let me be clear. We're making sure we do a very good job of fill rates with our customers. We're taking care of their needs to the best we possibly can, and I hope our customers would feel like that they're being taken care of, and that's not a real issue. We're certainly doing better, I would think, than the industry standard. And then on top of that, one of the things we've done, we don't talk a lot about our systems because those are kept for us, but we've done some really nice work in the supply chain systems that we use and our accuracy levels have improved across the board in Foodservice. They've really done some nice things over there to improve accuracy levels, which in the end, net-net, the customer sees at the service level, whether we had the inventory or not. It's helpful for them to make sure we pick the product correctly. So we're doing well in the outbound. On the inbound side of the business, supplier fill rates have been tough. They're dealing with the same challenge as everybody else has. It's absolutely manageable. We do a really good job with our inbound logistics approach, strategy, and team as we always have. So I feel confident we'll continue to work through that.

Helpful to understand the inbound versus outbound nature. The second and last question, I believe you have a material share of independent in the form of pizza and Italian segment. Are those sales keeping pace with the general April conditions of the poor recovery?

Yes, they are. We're running the same kind of increases over fiscal '19 that we've been running pretty much throughout the pandemic.

Your next question comes from the line of Jenna Giannelli of Goldman Sachs.

I'm curious on the acquisition front with Reinhart now behind you, successfully integrated and leverage coming down. How are you thinking about the potential timing or areas of interest with respect to future M&A? Or is there just kind of too much going on your plate right now to address that right now?

No, there's not too much going on on our plate to address that. So tackle that one first. Reinhart is well integrated, and the Foodservice division has done a really fabulous job bringing on an outstanding acquisition that has achieved every one of our expectations. On the Vistar side, Eby-Brown has done the same with the Vistar team. So we look at M&A with 2 approaches to bandwidth, Foodservice and the Vistar business being separate. So both of those have bandwidth for sure. As you know, from a liquidity perspective, we talked about $2.1 billion in liquidity. We are an acquisitive company. Our approach to M&A is unchanged. We're always looking for a good strategic fit for our business. And we'll continue to take a prudent approach to M&A and evaluate potential transactions as they arise.

Okay. That's super helpful. And on that point, as with the ample and healthy liquidity, I guess, how are you thinking about some of your upcoming callable debt? Does it make sense to potentially utilize some of that excess liquidity and just repay it? Or are you comfortable with kind of where the leverage is now and perhaps back in market?

We have had a strong free cash flow quarter, and I feel very encouraged and optimistic about the next quarter and those to follow. Our capital structure is very healthy, and we have effectively addressed any liquidity concerns related to COVID. Our treasury team does an excellent job managing this alongside the rest of the organization, and I believe we will continue to manage it well.

Your next question comes from the line of Carla Casella of JPMorgan.

You mentioned that your working capital was strong in the last quarter. I'm curious about how we should expect it to perform in the fourth quarter, especially considering that last year you had an unusually large source of cash at $485 million. Should we anticipate a normalization this year? Can you provide any outlook for working capital?

I would describe the situation as showing slight improvements. Throughout COVID, our organization has taken a disciplined and smart approach to managing working capital, drawing on years of experience and strong relationships with customers and suppliers. We have our own strategies for engaging with suppliers, which have proven helpful and important. Even though sales volume significantly increased in the third quarter and even more in April, we effectively managed our inventory and are very pleased with how receivables have been handled. I feel that our customers, sales team, and the entire organization collaborated well to ensure that everyone fulfilled their commitments. I'm satisfied with how receivables have been managed, and I don’t anticipate any changes in this approach moving forward.

Okay. Great. Do you expect the payables to remain at the higher levels they have been since around mid last year, or will they go back to normal once we are fully out of COVID?

Yes, I believe what we're seeing in 3Q will probably be the norm going forward. How we're relating to suppliers right now is our approach that we're going to take unless we have a reason to change.

Your next question comes from the line of Peter Saleh of BTIG.

Great. I want to come back to the conversation around labor. Given the current volumes that you guys are seeing past 7 weeks, I think you said kind of all-time highs, are you comfortable with the level of staffing, the drivers, and the warehouse employees? Or do you feel like you're understaffed to service those levels? And then secondly, do you anticipate any? Or are you seeing any evidence of slack in the labor market at all in anticipation of the unemployment benefits expiring in the fall? Or do you think this is something that's going to carry through the end of the year?

Yes. I'll start off with staffing. No, we're certainly not happy with our level of staffing. We could use more drivers; we could use more warehouse people. And we're continuing to hire and continuing to train. And we thought we were ahead of it, and the rebound in sales was greater than what we expected. So we have some catching up to do. I think that there's going to be enough people. And I do believe that for several reasons that the current unemployment and stimulus activity has had an impact because people will literally tell us that they want to come to work, but they'll do it after the enhanced unemployment ends. Unfortunate situation, but you're going to deal with reality. So I do think that the employment situation will get better. We're a great industry to work in. I'm not sure that we make sure enough people understand that, but we're a great industry to work in, and the compensation is high, particularly for a driver, and we'll find people that appreciate that.

Your next question comes from the line of Fred Wightman of Wolfe Research.

I was wondering if you could just comment on the sales gap between Reinhart and the legacy PFG business and sort of what you're seeing at this point in the recovery. I think last quarter, you'd mentioned that Reinhart was sort of in the middle with the market and sort of the legacy business. Wondering if that gap has continued to shrink as we've seen the accelerating trends in March and April? And any other color that you could comment on would be helpful.

Yes. We have not seen any industry numbers for April yet. However, what we've noticed is that Reinhart has been performing increasingly better and is now closer to Performance Foodservice as the year has progressed, showing significant growth compared to 2019 over the last four weeks. This trend started at the end of March when they began exceeding previous performance levels. There have been consistent upward movements and a noticeable ramp-up.

That was our final question for today. I will now turn the call to Bill Marshall for closing comments.

Thank you for joining our call today. If you have any follow-up questions, please contact us at Investor Relations.

Thank you for participating in PFG's Fiscal Year Q3 2021 Earnings Conference Call. You may now disconnect your lines, and have a wonderful day.