Performance Food Group Co Q1 FY2022 Earnings Call

Good day, and welcome to the PFG's Quarter One 2022 Earnings Conference Call. I would now like to turn the call over to Bill Marshall, Vice President of Investor Relations for PFG. Please go ahead, sir.

Thank you, 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 2022 fiscal first quarter 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 2021 fiscal first quarter. Additionally, occasionally during our call today, as noted, we are comparing results to the same period in our 2020 fiscal first quarter. The results discussed on this call will include GAAP and non-GAAP results for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found at the back of the earnings release. Our remarks on this call and in the earnings release contain forward-looking statements and projections of future results. Please review the cautionary forward-looking statements section in today's earnings release and our SEC filings for various factors that could cause our actual results to differ materially from our forward-looking statements and projections. Now, I'd like to turn the call over to George.

Thanks, Bill. Good morning, everyone, and thank you for joining our call today. I'm excited to be able to share PFG's first quarter results and many of the important strategic actions our company is taking. We believe our business position is extremely strong, reflecting the hard work from all our associates and the dedication of our suppliers and customers. PFG is posting record levels of sales, all while delivering on our vision of distribution leadership by building upon our core business and executing strategic transactions. The actions we have taken over the past several years have transformed PFG from a traditional foodservice distributor to a multichannel, multiproduct specialty distribution company, expanding the boundaries of our industry's typical end market. The result is a more diverse business model that allows us to align our capabilities with the evolution of our customers and their consumers. As you know, we closed the Core-Mark acquisition at the beginning of September and are excited to be able to welcome their associates to the PFG family of companies. We view the convenience channel as providing a major growth opportunity as these customers look to drive store traffic by providing better food and food service options. As one entity, PFG offers convenience operators the candy, snack and beverage expertise of Vistar paired with our foodservice leadership at Performance Foodservice, all under the umbrella of Core-Mark and Eby-Brown, two of the largest and most experienced convenience store distribution companies in North America. I will share more details on the integration efforts already underway as well as our strategic vision for the convenience business in a moment. But before we get into the details of the quarter, I think it's important to reflect on how far our company has come over the past 18 months. As we entered calendar 2020, none of us could have predicted what was in store for our country, industry and company. At the time, PFG was generating about $23 billion in annual net sales. It would have been hard to envision where we would be today with a view toward doubling our sales and ultimately eclipsing $50 billion in revenue and $1 billion of adjusted EBITDA. We're not only a larger company, but we believe that we are a stronger company with increasingly diverse revenue streams, providing growth opportunities that were not present just a few years ago. It goes without saying that we could not have made this progress without the commitment and support from every PFG associate as well as our customers and suppliers. The partnerships we have forged and solidified propelled our company to new heights. We will keep executing our vision, and with it, the possibility for sales and gross profit over the long term. The addition of Eby-Brown and Reinhart Foodservice were two of the transformative aspects of our journey. By adding Eby, we built the foundation of our convenience business, paving the way for the Core-Mark acquisition. With Reinhart, we added another bedrock foodservice distribution platform to our already strong broadline business. Let's start with an update on Reinhart. We cannot be more pleased with the efforts and performance of this business. As we have shared with you since closing that deal, our integration has been on or ahead of schedule since day one. This is a feat in and of itself. We were confident that the business results would follow in step with the goal of accelerating Reinhart's growth to be in line with legacy Performance Foodservice. We are very pleased to share with you that we have achieved an important milestone towards that ambition. For the second consecutive quarter, Reinhart independent case volume growth outpaced our legacy foodservice business. Shortly after the close of Reinhart, we saw an immediate positive impact. Now that the performances are aligned, we can say that Reinhart and Performance Foodservice are truly one business. This is obviously a strong testament to the efforts from both Reinhart and Performance Foodservice associates and work by our entire integration team. This success story reinforces our confidence and excitement for Core-Mark. As I mentioned, we closed the Core-Mark transaction in early September, and one month of results are included in our fiscal 2022 first quarter numbers. More importantly, the integration is off to a fast start. A tremendous amount of work has been put in to bring these two great organizations together. We have already seen strong camaraderie between Eby and Core-Mark. Shortly after closing the deal, both companies participated in an annual convenience store-focused event. I was able to witness the collaboration between Eby and Core-Mark associates firsthand. We believe that the ability of the two organizations to work together with a single focus is the key ingredient for successful M&A. As I described above, the sentiment was present with Reinhart and Performance Foodservice. It is exciting to see a similar dynamic with our convenience efforts. Our early success with Core-Mark has already extended into business wins. I am pleased to announce that we've converted an important legacy convenience customer over to our foodservice platform while also adding a different legacy foodservice customer's convenience business. It is obviously very early days, but we are already seeing our convenience strategy play out as we had hoped it would. In the coming quarters, we will continue to share examples of our progress in this important strategic endeavor. Our efforts on the M&A front have added to our already strong base business, which continues to operate at a very high level. Starting with our Foodservice segment, we continue to see top-line growth far exceeding what we had anticipated just a few quarters ago. Our Foodservice segment sales surpassed $6.3 billion in the quarter, a 26% increase over the previous year. We continue to see a significant improvement in our mix of business as our independent restaurant case and sales growth outpaced total company results. After outperforming the industry last year, our independent business continues to impress. On a two-year basis, independent unit case volume increased more than 11% compared to the first quarter of fiscal 2020, including pro forma Reinhart results in that period. This means that our independent case volume is significantly higher than it was entering calendar 2020, quite a feat given the operating environment since that time. Specifically, independent business now represents over 39% of our total foodservice net sales, which is about 4 percentage points higher than it was two years ago. As a reminder, we continue to define independent as customers with fewer than five locations. We are also encouraged by the underlying trends within our foodservice results. For example, areas of the business that have been strong over the past 18 months, notably pizza, Italian and Hispanic, continued to perform well in the fiscal first quarter of 2022. According to our data, our three-month dollar market share through September remains well above 2019 levels in independent restaurants. This trend holds true across pizza, Italian and Hispanic concepts. We have continued to invest in these areas of strength, and the data shows our efforts over the past 1.5 years have paid off. We believe that these investments will result in long-term gains and bode well for our sales and profit potential. Overall, our Foodservice segment continues to produce solid sales and profit growth despite the labor cost challenges, which the majority of our divisions are managing well. At Vistar, we are incredibly pleased with the sequential improvement that business is experiencing. Even without a full recovery in theater and office coffee, Vistar results have improved dramatically. Recent box office trends have caused us to be optimistic about the future for that channel. As you know, a strong recovery at Vistar, which we are expecting, would prove to be very favorable to our margin profile in the quarters ahead. We also wanted to discuss an area that we are particularly excited about at Vistar. As you may recall, we have been building our retail automation warehouse network and are pleased to announce that we are now fully operational at all three facilities. The three locations, Retail East, Retail Central and Retail West are situated in areas that allow us to distribute to the vast majority of the country quickly and efficiently. While it is still early days, these operations allow us to tap into several exciting distribution opportunities, including customer fulfillment, direct-to-consumer e-commerce fulfillment and virtual warehousing. We believe this sets us up for incremental selling and growth avenues while consolidating our capacity at other operating companies. The nature of this business means we can efficiently sell to a legacy store customer, a foodservice customer or direct to consumers while maintaining significantly more SKUs with less complexity. In today's operating environment where supply chains are stretched and customers are demanding an increasing number of products, we believe we have an advantage compared to our competition. As we continue to grow this business, you will hear more about our progress in this strategic objective. To summarize, we're off to a strong start to fiscal 2022. Our foodservice business continues to perform well with sizable gains in the high-margin independent restaurant business. This starts seeing steady sequential improvement, which we expect to continue in the quarters ahead. We are thrilled to have closed the Core-Mark acquisition during the quarter, and the integration process is already ahead of schedule. We have added new business in the convenience channel on the traditional C-store side as well as within C-store food service. Our company is executing at a very high level while also making progress in our strategic vision. Sales growth will continue to be a priority for PFG. And over time, we expect to see improvement in EBITDA margin, which is another focus area for our organization. As Jim will discuss in a moment, we have a strong balance sheet and cash flow profile, which supports our investment in the business. I'm excited about the progress we have made in a few short years and the potential we have for the years ahead. I'll now turn it over to Jim for an update on our fiscal first quarter and financial position.

Thank you, George, and good morning, everyone. Before I review our results for the first quarter, I would like to review our financial position and cash flow dynamics. As George mentioned, we are very pleased with the strong recovery our business is experiencing. We believe that these results are supported by our solid balance sheet and cash flow profile, which has helped fund the expansion of our business and support our working capital investments. We ended the quarter with $2.5 billion of total liquidity, the highest level in our company's history. We upsized our ABL facility during the quarter for a potential borrowing base of $4 billion, up from $3 billion. We believe that our ability to increase our ABL to this level, one of the largest in the country reflects our banking partners' confidence in our business model and strategic vision. We also issued $1 billion of senior notes during fiscal Q1 at an interest rate of 4.25%. We were able to take advantage of the interest rate environment to lock in this attractive rate to partially fund the cash portion of the Core-Mark acquisition as well as pay off $350 million of 2024 notes, which had a 5.5% coupon. All in, we finished the quarter with approximately $4.1 billion of total debt, including our finance lease obligations. Turning to cash flow, in the first quarter, we generated about $32 million of operating cash flow as our team continues to do a fantastic job managing our working capital position. Accounts receivable increased along with the sales recovery, and our receivables over 60 days outstanding remain at a very low level. Disciplined management of inventory and accounts payable drove cash generation at both line items. We believe that our inventory build is now substantially complete. Factoring in the $24.4 million of capital expenditures in the quarter, PFG generated positive free cash flow of $7.4 million in the quarter. We are pleased with our organization's ability to generate positive cash flow even while investing in the working capital needed to keep pace with a rapidly improving business environment. We expect our cash generation to improve even further with the addition of the Core-Mark business. With that, let's quickly review some highlights from our fiscal first quarter business performance. Net sales increased 47.4% in the quarter to $10.4 billion, driven by one month of Core-Mark's sales in addition to the inflation-driven pricing and a continued recovery in the business environment. Total case volume increased approximately 27% and was up 17.8%, excluding the contribution from Core-Mark. Keep in mind that the high selling price of cigarettes in addition to high rates of inflation impact the difference between case volume increases and our top line growth. Independent cases increased 21.1% in the fiscal first quarter as we continue to see solid momentum in our independent business. We continue to be very pleased with our independent results and believe it provides a solid foundation for long-term profit growth at PFG. As George mentioned earlier on the call, over a two-year period from the fiscal first quarter of 2020 through the most recent quarter, our independent cases increased over 11%, including Reinhart cases in the first quarter of 2020 period. We believe that this is truly a remarkable result, highlighting our business's resiliency and the hard work of our associates through some challenging times for our industry. Total PFG gross profit increased 40.1% compared to the prior year quarter, helped by the independent case growth I just mentioned. Core-Mark contributed $89.1 million to gross profit, including an $8.8 million amortization step-up on inventory acquired. Our reported gross profit margin in the quarter was 11%, down from 11.6% in the prior year period but impacted by the addition of Core-Mark. Food cost inflation continued to move higher in the quarter. Our weighted food cost inflation was about 11.1%, up sequentially as we continue to see double-digit increases in our foodservice commodities, including meat, poultry, seafood, and disposables. Keep in mind that our total company inflation is impacted by somewhat lower levels seen at Vistar, which has more exposure to packaged goods and tobacco. Our Foodservice operations experienced inflation in the low teens during the fiscal first quarter. While inflation has kept pace well above historic levels, we have successfully passed along these increases. Gross profit per case was up over $0.52 in the first quarter compared to the prior year period. Keep in mind that this includes one month of Core-Mark's results and is impacted by the higher gross profit per case for tobacco. In the first quarter, PFG had a net income of $4.7 million. Adjusted EBITDA increased 35.9% to $183.7 million. Diluted earnings per share was $0.03 in the first quarter, while adjusted diluted earnings per share was $0.43. I'd like to finish by discussing our outlook for the remainder of fiscal 2022. As noted in our earnings press release this morning, we anticipate fiscal second quarter 2022 net sales to be in a range of $12.7 billion to $12.9 billion, highlighting the strong top-line momentum our business has achieved. We also look for adjusted EBITDA for the upcoming quarter in a range of $210 million to $225 million. For the full fiscal year, we are guiding to net sales of $49.5 billion to $50.5 billion and adjusted EBITDA between $940 million and $960 million. Let me provide some additional color on the quarterly cadence for the upcoming year. As you know, the winter months are typically the smallest from a seasonality perspective. As a result, we would expect our Q3 2022 net sales and adjusted EBITDA to be similar to Q2, accelerating in fiscal Q4 2022. The fourth quarter acceleration in sales and adjusted EBITDA reflects typical summer seasonality plus some expected easing of the labor cost pressures that George mentioned earlier in the call. In summary, we are extremely pleased with the beginning of fiscal 2022. PFG continues to be an industry leader with continued success in the independent restaurant space and consistent recovery in our Vistar business. During the quarter, we successfully closed the Core-Mark transaction and are well underway in our plan to unlock sizable value from the convenience store space. Our balance sheet is strong and has allowed us to invest behind long-term market share and sales growth. We believe PFG is in a great position to convert our top line sales into sustainable profit growth. Our organization is engaged and focused on important enterprise initiatives that we believe will create long-term value for all stakeholders. We appreciate your interest in Performance Food Group. And with that, we'd be happy to take your questions.

And we will take our first question from Kelly Bania with BMO Capital. Your line is now open.

There was a discussion of just some of the encouraging signs at Vistar and what you're seeing maybe in the theater, but can you give us a little color in what you're expecting in terms of improvement in sales and EBITDA at the Vistar business, the kind of legacy Vistar business as we think about your guidance for the year?

While we're very encouraged, and I think the biggest reason for encouragement is the amount of new business that we picked up going through this pandemic. We are very close to fiscal 2020 sales. We've gotten closer each month, with October being the best month. We are back to the same return on sales, or I guess I would put an EBITDA margin that we had before. So, we're looking for improvement with some of these channels coming back. The biggest ones would be office coffee and theater. We're not sure that they'll come back to the levels they were before. But if they don't, we will certainly be exceeding fiscal 2020 sales without that happening, so just really encouraged.

Great. That's very helpful. And I guess just another one here, just a lot of discussion across the space on fill rates and obviously, labor and just the constraints happening both internally and at the customer level. Maybe can you just talk about where you think you stand on those two factors, particularly relative to a lot of the other competitors out there?

We've certainly faced challenges. This has not been easy. We entered this situation believing we had made solid decisions. Like many companies, we held daily calls during the toughest times, and I would conclude each call by emphasizing the importance of managing inventory and staffing, as we anticipated that conditions would eventually improve. While that guidance was helpful, it didn't sustain us for an extended period because we underestimated the hiring difficulties and the extent of the issues our suppliers were experiencing. They were grappling with challenges similar to ours, but the COVID-related problems were more pronounced for them, especially for those operating with just one or two plants. This situation made things quite tough. We've had to adapt; we've spent money flying in temporary workers from other distribution centers that were less affected. September was particularly hard, but October has shown a notable drop in the number of temporary workers we employ, which is encouraging. However, we remain cautious. As Jim has outlined, we expect to continue facing some challenges going into 2022 before we return to a certain level of normalcy. I also want to point out that our labor shortage is not as critical as it used to be. We've effectively improved our staffing levels, and the reduction in temporary workers is beneficial, considering their high costs. Everyone is vying for temp labor these days. The optimistic takeaway is that we are progressing more towards overcoming the learning curve rather than needing more personnel. This job, particularly in warehousing, allows for relatively quick training, but it does take time for new hires to reach full productivity. To sum up, we don't want to give the impression that we have completely resolved this issue, but we do feel that we're on a positive trajectory.

And we will take our next question from Edward Kelly with Wells Fargo. Your line is now open.

Could you talk a bit more just around the outlook for the temporary labor cost over the next few quarters? So I heard you mention that you expect some easing in Q4. Does that mean that Q2 and Q3, the level of pressure is similar to Q1? Just kind of how do we think about the magnitude of that? And then you called the cost temporary. So is it right for us to look at these costs as we think about your business over a multi-year period? When we think about EBITDA guidance this year that EBITDA would obviously be higher by these costs? And I guess ultimately, kind of like what gives you the confidence in the word temporary?

Yes. Thanks, Ed. Thanks for that question. I think the first thing I'd like to say is while we do have these heavy temp costs as most food distributors do, I really do appreciate all the hard work our supply chain has done because at the end of the day, regardless of the heavy labor costs we've had and the difficulty in moving product through the supply chain as most distributors are, I think you'd agree, we posted some solid sales results. So that supply chain of ours is working very hard, and they're getting the job done. Second, as far as temporary versus long term, the vast majority of these costs, the majority of them are temporary and will abate. There's no doubt that some of these costs are structural. And it's certainly not the majority, it's the minority of the cost. But I think it would be wrong for us to say that some of them are going to be with us for a longer period of time. These contract costs, the temporary contract workers will start to fade away. We expect them to continue primarily through Q2, some easing in Q3, and we expect to work ourselves out of it in Q4. Important to note that the entire contract labor cost, all that number we quoted that particular cost goes away, those contract workers will be replaced to some degree of full-time workers. So it's not a dollar for dollar reduction.

Great. That's helpful. And I wanted to ask just one follow-up, big picture. It feels a little early to ask this question because you just closed on Core-Mark. But your financial position is strong. And Jim, you led with that. Can you talk about the M&A backdrop? It's not getting any easier out there to operate. And your appetite, I guess, at this point to do more? Or do you need some time to digest?

Well, I think that's a really good question. We've done a lot recently, and we don't feel any stress as far as the impact on the organization from that on the one hand, but on the other hand, sometimes you want to tap the brake a little bit and take a little bit of a rest and make sure that everything has gone well. But at the same time, we want to be very strategic. And I guess on top of that, we want to make sure that we take advantage of opportunities when they're available and they may not be available in the future. So we want to continue to be opportunistic. I think that we have a balance sheet that gives us still some flexibility. Paying down debt is always important, but it gives us some flexibility. So I would put us in the camp of if there's something available that really fits for us, we're going to jump through hoops to make sure that we get that done. Core-Mark, I believe, is going to be very similar to Reinhart. I think it's a good cultural match, and that's very important to us. In some instances, it's more important than getting something at a really great price. I think I'll leave it at that. We have things we're looking at now, not things that we went out and sourced, it's people that came to us, and they're opportunistic, but they're not really big. So I think that's more what you'll see from us is continued activity but not real large.

We will take our next question from Alex Slagle with Jefferies. Your line is now open.

Question on the independent case growth, and curious how this two-year trend that you mentioned compares to the fourth quarter on an apples-to-apples basis, if you have that? And then curious with defense, if you have a sense, but what's driving the strong relative performance? And how much of this is category exposure versus winning new business versus other specific actions that you're taking to support your existing independent immersion and gain wallet share with them?

When we compare our case growth over the past two years to 2020, the 11% growth we've seen indicates positive prospects for the future, especially considering Reinhart's strong performance during this timeframe. Specifically, Reinhart's success in the last couple of quarters compared to two years ago has instilled confidence in our outlook. Referring to the impact of COVID, we believe our customer base was well-prepared for growth, allowing us to capture significant market share in categories that favor takeout and delivery. Despite facing challenging comparisons to last year, we've sustained low double-digit growth in those channels, contributing to our confidence moving ahead. Additionally, when we analyze our case growth alongside inflation, we observe that the difference between this growth and our sales growth is at its peak. This indicates that our business mix has increasingly shifted toward higher-priced products, and we have also performed well in the retail sector unexpectedly. Overall, we feel well-positioned in this environment, which isn't typical, and we've actually seen a slight increase from the 11% growth rate in recent months, which has been quite encouraging.

Great. And then on Core-Mark, and sort of retention and turnover post-acquisition, has that played out as expected? I know it's early, but any thoughts there?

We only have four weeks of Q1 data and have experienced four weeks since then. Regarding business retention, we have not lost any business during that time. We have faced similar labor challenges at Core-Mark as we have in our other businesses, which can create some disruption. However, we have maintained momentum. The only notable change is that while cigarettes performed well during the early and mid-stages of COVID, they have now reverted to a level that is lower than their historical trends. This adjustment reflects a more natural progression over the past two years. Although cigarettes generate significant revenue, they contribute little to gross profit, and we do not actively market or seek out business in that area. Our foodservice business is performing exceptionally well. Additionally, we have secured an agreement with a convenience store chain for foodservice products through Performance Foodservice, and in turn, we have transitioned a Core-Mark customer with a solid convenience footprint to our foodservice offerings. Neither arrangement has commenced yet; one will begin soon and the other at the start of February, as we want to ensure we have the necessary labor resources in place to manage their business effectively.

George, I would add, when we talked about the Reinhart acquisition, we completed that acquisition. We made it clear that we were pleased with the talent that Reinhart brought to the organization as well as a cultural fit. And that really bodes well and proved out as we move through integration and Reinhart began to deliver even better results than they had in the past. We see those same signs with the Core-Mark team.

That's for sure. Very impressed with their management team, and I'll use the word again, but culturally, it's a great fit with us. They've got a great leader who will contribute to our company beyond just the convenience area. So, we're pleased.

And we will take our next question from John Heinbockel with Guggenheim. Your line is now open.

George, I want to start with Core-Mark, right? So maybe talk about the process of cross-selling, right, kind of institutionalizing that, and you gave two examples, but really addressing that how you're attacking that every day, plus your visibility on contracts coming up, more chunky stuff? And then do you think their non-tobacco business, right, which is really the key. Can you consistently grow that double digit? Or is that a high bar?

Yes, I can address that. Regarding our market approach and the overlap with Vistar and Performance Foodservice, we are still working on that. Currently, we generate more business from Performance Foodservice than from Core-Mark and Eby combined, indicating significant potential. There are accounts with limited commitment to foodservice, where it makes sense to continue operating under the Core-Mark and Eby structure. For those with a strong commitment to foodservice, we will be sending four trucks into those accounts. The examples I provided will see two trucks dispatched to them. We still need to make some decisions, but our teams are collaborating closely to find the best solution, which will be determined on an individual account basis. There is quite a bit of work ahead of us. In terms of growth, I expect it will come in segments rather than the consistent flow we usually see with Performance Foodservice. We perform well with independent convenience operators, but they either show a strong commitment to foodservice, which is a minority, or very little commitment at all. I foresee steady growth similar to the 6% to 10% we've discussed in foodservice, particularly for the chain aspect, which, while only comprising less than half of the units, indicates a significant portion of sales. However, I want to emphasize that we have the largest pipeline of business currently being processed. Scott McPherson has mentioned that this funnel is the largest they have seen, even prior to the merger, indicating a lot of activity, though not all of it is finalized yet.

On the foodservice side, historically, you have aimed for mid-single-digit growth in independent cases in recent years, especially before COVID. How do you view that now? One expectation during COVID was that there would be a consolidation of accounts, which would mean that all primary distributors would gain a greater share of spending. Is this trend continuing? How significant is this opportunity compared to the expected mid-single-digit growth in independent cases?

Well, I think that's a great opportunity, but I think the bigger opportunity will be new business. We are running the highest increase per customer in both lines and cases that we've ever run by a good bit. We're real conscious of picking up business right now that we're not capable of supplying properly, and not only that, but our salespeople are very busy, making sure that we're servicing our customers properly. So our increase in new accounts is much lower than it typically is. And I think that's where our big opportunity once we have full confidence from a labor standpoint. And that's an area that we've always done well with. And I think that we'll continue to do well with, and that's just gone out and pursuing business that we don't have at all today. That's the bigger opportunity.

We will take our next question from Jeffrey Bernstein with Barclays. Your line is now open.

This is Jeff Priester filling in for Jeff Bernstein. I have one question and a follow-up. First, regarding your capital allocation priorities, PFG has expanded into more channels over time, which requires more resources. How do you approach the allocation of capital expenditures or investments across these various opportunity channels? Do you anticipate that each channel will be responsible for funding its own growth, particularly in relation to Foodservice and Core-Mark? Additionally, how much cash would you prefer to maintain on your balance sheet for comfort? I have one follow-up after that.

We consider the previous question in terms of liquidity, and we aim to optimize our capital structure to ensure that cash is used effectively. I see it from a liquidity standpoint. Regarding capital expenditures, our priorities include paying down debt and managing our maintenance capital while also investing for growth. I believe both the Foodservice division and Vistar will be responsible for funding their own capital expenditures, and they handle this well. Each of these divisions will be adequately supported in terms of maintenance capital and preparing for growth.

And I'm going to give you a little bit more of an answer on that, too. Performance Foodservice, we have several projects that are in place right now, a couple of new facilities and some addition to existing facilities. Vistar, the same, not quite to the extent, but we've never been bashful about adding capacity to Vistar, and most of the distribution centers that we had, if you go back to when we bought PFG, we've really redone almost all the Vistar distribution centers. And these retail pick-and-pack facilities, fulfillment facilities, we've added three of those. We have all two of them profitable at this point. We want to get better at it coming up here in the near future, but we have aspirations to take that to probably six of those distribution centers. We have some markets where we want to improve our brick-and-mortar from a convenience standpoint between Core-Mark and Eby, so we'll be spending some money there. In our national chain business that you can go through all the way back to 2008 when we did the original acquisition, we haven't done any expansion projects. We've actually closed two distribution businesses in there. It's been a pretty good cash generator for us, but it's basically been maintenance CapEx, and it doesn't come with the kind of margins that you're going to spend a lot of CapEx on. So that gives you an idea from the different businesses. I think that's important for us to communicate where we see our growth coming.

Appreciate that insight. And then just on inflation. Obviously, you and your peers are all facing 10% plus inflation. But just kind of what have you been seeing so far this quarter? And kind of what does your outlook look like in terms of when this might start to abate?

Yes. Look, obviously, inflation continued to be significant in the quarter, coming in at 11.1% for PFG overall and low teens for Foodservice. We had larger increases in the proteins for sure and disposables. But it was really broad-based over all the categories. It wasn't a surprise to us. I don't think it was a surprise to anybody, and we're set up to handle inflation and pass along quickly to our customers as appropriate, and you saw that in this quarter. We feel good about our ability to pass it along. We'll continue to manage it and manage it fairly. As far as predicting it, it's pretty difficult to do, but I think it will be definitely with us in the near term. Hard to say how long.

I think commodity products are experiencing significant inflation driven by supply and demand, which could be temporary, but I'm not an expert. When something is in short supply and there’s high demand, inflation is inevitable. Our customers are now very focused on securing products and their costs, which places us in a similar position. In contrast, companies dealing with more packaged or processed products work hard to secure price increases, and due to the difficulty of obtaining these products, any new pricing levels established are unlikely to revert. I don’t view this inflation as temporary; rather, it seems permanent. The only change could be for those companies that frequently raise prices; they might not feel as pressured to increase them again if their input costs decline. However, I don’t foresee a swift decrease in inflation.

And we will take our next question from Lauren Silberman with Crédit Suisse. Your line is now open.

Just a follow-up on the temporary contract labor. You called out a $52 million increase in the quarter. Can you help us understand the incremental cost of using the temporary labor relative to if you had full staffing, the combination of direct costs as well as productivity? Any way to quantify how much better the cost would have been as you think about a normalized environment?

Yes. I think the only thing I could share with you, and this is not specific or scientific by any means, is we think of the temporary cost as approaching double what the typical cost of an employee would be. It's expensive. And then there's also one other important dimension to consider, our full-time folks are primarily very well trained other than the new people. They make fewer mistakes. They're much more efficient. As we move out of the temporary or contract labor workforce, we'll start to be able to train those folks and we'll see some improvement there.

I should add that the process will be gradual, even though we made some good progress in October. One reason for this is that we've had our most productive employees working a lot of overtime, and they need a break. Therefore, we'll keep some temporary staff a bit longer to help our team return to a normal work pace.

That's very helpful. In terms of independent customers, can you share what percentage independent customers are serving today relative to pre-COVID? And if you're starting to see the appetite for new unit growth increasing, and then any color on the underlying performance of independent restaurants versus chain restaurants?

We have more independent customers now compared to before COVID. I monitor this on a weekly basis, including at the operational company level. There are some areas where we've seen a decline, which we can largely associate with labor and service challenges, and these areas are where we've lost customers. We need to address this as we move forward. Regarding the health of independent restaurants, we have been observing new restaurant openings for several months, indicating the resilience of this business. However, I have concerns about those customers who survived with the help of PPP funding and their future sustainability. We are doing our best to support our customers while ensuring we maintain strict credit practices, which is crucial. While I believe independent restaurants are in good health, the landscape might become more competitive once the current situation stabilizes. Locations that were empty are being filled quickly, which could lead to an oversupply of seating. At this moment, we face not just a shortage of seats but also a lack of staff to serve and cook. The industry will undergo significant changes, and although I can't predict the future, I believe that independent establishments will continue to thrive.

Just a final one. Anything you can expand on with what you're seeing in October's case growth and strength there?

It's not a huge difference. We're seeing a slight uptick versus two years ago each month, but it's not huge. We've been negatively impacted by having a distribution center that hasn't been opened since the hurricane in Louisiana. So that's had some impact on us. That is opening back up next week. But I just see it just a slow, steady increase, but slow off a high level. So we don't mind that.

We will take our next question from Mark Carden with UBS. Your line is now open.

So digging into labor a bit more, it sounds like a lot of the temporary headwinds are coming from the contract side. But when we think about full-time noncontract workers, we've heard some different perspectives. Some have been talking more about implementing base pay raises, and others have talked more about spot bonuses. What's your view on the industry at this point? Are you expecting more structural pressures? Or do you see being mainly transitory?

I think we're seeing both. We've had markets where you've studied the market, you give somebody a third-party to study it, maybe that's looking at it a little bit different. And if we're not paying enough in that market, we take our payoff. And we did it pretty substantially across Eby-Brown. I think that it's helped us. It was the right thing to do. But most of what we've done has been in the form of sign-on bonuses or stay bonuses temporary. But where we need to, we'll make the investment in people that we need to make.

And we will take our next question from John Glass with Morgan Stanley. Your line is now open.

And most have been addressed. However, George, you didn't mention the new automated facility in Vistar for pick and pack. What is the main opportunity for acquiring new customers there? You referred to DTC; I’m uncertain if you’ve previously engaged in that business. Is the channel simply more efficient, or does it present a new revenue opportunity associated with those facilities?

Yes, there's a combination of both. It's certainly more efficient than managing 21 distribution centers. However, the first step was to increase volume to the point where we could purchase key items in truckload quantities for the pick and pack center. This process took several years. A significant portion of our current business involves picking, packing, and delivering through FedEx, UPS, or occasionally our own vehicles. We see considerable future opportunities in fulfilling orders for other companies, which we believe could become a significant segment for us. We're still in the early phases, but it has been quite successful so far. This approach is often driven by suppliers, and in some instances, by customers who prefer to outsource their fulfillment operations to us. Additionally, we can receive products in truckloads that can then be distributed to our distribution centers, similar to what Core-Mark does. We've also implemented a system that allows our food service teams to place orders that are fulfilled from one of those centers, tailored to the specific product offerings. This initiative has been successful so far, and I believe once it is fully integrated into all our foodservice distribution centers, it will significantly benefit our single-serve business within foodservice.

And we will take our next question from Nicole Miller with Piper Sandler. Your line is now open.

I have a couple of quick questions. I want to clarify the $52 million in temporary expenses that appears to be a one-time occurrence. It seems like this will extend into the second quarter, so I want to ensure that this is included in your guidance. Additionally, when will it be removed, and when it does roll off, is the operating expense around $1 billion? As I analyze the numbers, that seems to be the base expense based on the guidance you've given. I just want to confirm that I'm accurately capturing that line item.

So it is contemplated in guidance. We expect it to begin to roll off towards the end of Q2, early Q3, and we expect it to significantly abate as we go into Q4. I'm not sure I followed your last question.

Once we account for that operational expense, it’s about $1 billion, give or take. That’s the underlying expense based on the guidance you've provided. I just want to ensure that I have that line item correct.

So we've provided, we believe, helpful guidance around sales and adjusted EBITDA, and we've given some what I believe is hopefully helpful color around the content of the P&L, and I'm going to leave the answer at that. But sure do appreciate the question.

Yes. Okay. I think that's about right. Got it. And then I might just ask this labor question a little bit differently. So how is turnover? And maybe if there's a distinction between the distribution facilities and the drivers, how is that trending?

Well, our turnover is fairly close to historical turnovers, except the churn is very, very high. In other words, people that come in and they do the work for a week or two weeks and they leave, which isn't all bad because if it's not the type of work that they're capable of doing or that they want to do, that is the better outcome. So I think that's part of why it took us a long time to kind of get to where our people account is not where we want it to be, but getting close. And as I said, our attention will always be on recruiting and hiring, but our attention is really heavily focused right now on getting our productivity back to our normal standard and not only comes at a time.

That's very helpful context. In the restaurant world, if you can retain someone for 90 days, you may have a better chance of keeping them. When they discuss their turnover rates, the average is just that—an average. It tends to be much higher in the first 60 to 90 days. For you, does it take a few weeks or a few months before you can tell if a person will stay in their role?

There are numerous factors that can affect circumstances in our operations. Currently, with the training systems and technology we have, a person can learn the job fairly quickly, often within a couple of days. However, it usually takes about 60 to 90 days for them to become really efficient. We have team members who continue to improve even after a year, reducing errors and boosting productivity, but it all varies from person to person. For instance, we recently had a selector in Massachusetts who achieved picking his millionth case without making a mistake, which is quite rare. Some individuals excel remarkably well, while others may struggle, similar to any job.

And we will take our final question from Peter Sale with BTIG. Your line is now open.

Great. I think you guys touched on this a little bit. I was hoping you can elaborate on the independent case count growth. Can you give us a sense on how much of that growth that you're seeing is coming from new customers versus the existing customers that you had maybe pre-COVID that are maybe accelerating their case counts or their traffic with you?

Existing customers are producing more of our growth today than new customers, and that's never happened with us before. Some of that is self-inflicted because we don't want to go out and the first experience that the customer gets with us is not a great experience. So I think that, that will turn back again the other way once we feel we're in a much better position from a labor standpoint. The most difficult customer for us to handle today is mostly chain business, but they don't experience anybody other than us and they're not getting the experience they used to get, and that makes it very difficult. And I will also say there's been so much publicity around the supply chain issues through every industry that kind of waned in people's expectation level, unfortunately, isn't what it used to be. And I will tell you when I go into a restaurant, my expectation level isn't what it used to be either.

Understood. And just lastly, on the food cost inflation and the ability to pass on. Have you had any resistance by channel or different customers in terms of passing on the inflation? Or has it been pretty seamless?

It's been quite seamless. I think part of that is that people want to get products. This is a competitive industry, and it will always be competitive, but right now, that competition has diminished to some extent.

There are no further questions on the line at this time. I will turn the program back over to Bill Marshall for any additional or closing remarks.

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

This does conclude today's program. Thank you for your participation. You may disconnect at any time.