Performance Food Group Co (PFGC) Q4 2023 Earnings Call Transcript

Good day and welcome to PFG's Fiscal Year Q4 2023 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 and good morning. We're here with George Holm, PFG's CEO; and Patrick Hatcher, PFG's CFO. We issued a press release this morning regarding our 2023 fiscal fourth quarter and full-year results, which can be found in the Investor Relations section of our website at pfgc.com. During our call today, unless otherwise stated, we're comparing results to the result in the same period in fiscal 2022. The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found in the back of the earnings release. As a reminder, in the fiscal first quarter of 2023, we updated our segment reporting metrics to adjusted EBITDA from the prior EBITDA metric. Accordingly, the segment results for the fourth fiscal quarter of 2022 have been restated to reflect this change. 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. PFG had an outstanding fiscal 2023 and we are proud of what we were able to accomplish. More importantly, we are just as excited about the upcoming fiscal year, which we believe will include additional growth opportunities and continued financial success for our company. As you can see from our press release this morning, we are growing our highest-margin businesses, continuing to pick up market share in independent restaurants, and building upon our strengths in Convenience and Vistar. Our disciplined cost controls and focus on our financial position have enabled us to continue to invest behind growth opportunities while returning cash to stockholders. As you saw, we began to repurchase shares during the fiscal fourth quarter. Patrick will have more details to share about this program, but I wanted to highlight our buyback activity as a vote of confidence in our long-term business prospects. We plan to continue to reward our shareholders as we achieve financial success and we are excited about the company's future. We are just over a year removed from our Investor Day when we laid out our vision for the future and set three-year financial targets. We are just as confident today as we were then. In fact, the 2023 fiscal year progressed even more favorably than we had originally anticipated. At this time last year, we discussed our 2023 outlook, which included a net sales range of $56 billion to $58 billion and adjusted EBITDA between $1.15 billion and $1.25 billion. I'm pleased to report that our net sales result came in above the midpoint of that original range and adjusted EBITDA was $163 million above the midpoint of the target we set last year. I am proud of our organization's ability to accomplish these milestones and navigate what at times was a difficult operating environment. This morning, we also reiterated our previously-announced long-term targets. We remain confident in these projections, particularly after such a strong fiscal 2023. As you saw in our earnings release, the top-end of our fiscal 2024 adjusted EBITDA guidance is already at the low end of our fiscal 2025 target. Let's discuss the key components that are driving these strong results. Our Foodservice business is in excellent shape. We finished fiscal 2023 with fourth quarter independent case growth of 7.6% and a 6.2% increase for the full fiscal year. This is an outstanding result, especially given more difficult comparisons from the prior fiscal year period. Importantly, our independent case growth continued to accelerate at the start of fiscal 2024, coming in at about 9% in the first few weeks of the quarter. The investment in our sales force is paying off. So far, during the first quarter of fiscal 2024, we have seen consistent increases in independent cases per salesperson. We believe there is a long tail for our growth in independent restaurants particularly as new members of our sales team continue to hit their stride. Within independent restaurants, Performance brands were approximately 52% of total sales, again, showing the strength in our organization and our lead products. On the chain side of our business, some underlying weakness remains in foot traffic and the resulting case volume performance. However, due to our strong independent case growth, total Foodservice cases were up year-over-year. In the quarter, Foodservice experienced mild deflation of approximately 1.2%, a bit below where we had expected. While this did impact the top-line performance, it grew Foodservice adjusted EBITDA to $273 million, an all-time high for that segment. While we expect inflation to normalize as fiscal 2024 progresses, the structure of our business, including our fee-based contracts and pricing mechanics in the field should allow us to continue to successfully grow profit even in a low inflation or deflationary environment. Underpinning our strong Foodservice results are positive trends in several important metrics. In the independent restaurant channel, cases per drop increased compared to the prior year. As a result, we are seeing improvements in customer cases per week as our penetration improves and overall volume growth accelerates. As we highlighted last quarter, we continue to add new independent accounts at a rate similar to our total independent case growth, keeping our pipeline of new business strong for future periods. This is resulting in share gains for the independent channel. We are leveraging these top-line trends through continued focus on operating expense control, particularly in labor. Combined personnel expense per case for delivery and warehouse workers was down year-over-year, driven by improvements in lower contract labor costs and stable overtime expense. We are simultaneously investing in our sales force, which is driving our strong independent case growth. All these factors combined produced a strong finish to fiscal 2023, particularly in the independent restaurant space. We are excited for what fiscal 2024 has in store for our Foodservice operations. Vistar had another outstanding quarter, finishing off a very strong fiscal 2023. Despite challenging inventory gain comparisons, Vistar adjusted EBITDA increased 31.5% in the fiscal fourth quarter. Solid 18% top-line sales growth was the result of case volume increases and the continued benefit from higher rates of inflation. The year-over-year case increases were a result of strength in value, theater, and office services. We are excited about the performance of Vistar, particularly given the strong pipeline of new business opportunities. Inflation at Vistar remains elevated and was roughly 13% in the fourth quarter, which was a slight decline from the mid-teen inflation rate in the prior three quarters. We anticipate a deceleration in inflation at Vistar especially as we begin to lap price increases from the prior fiscal year period. Lower delivery and warehouse cost per case boosted bottom-line results, helped by lower fuel prices and freight cost favorability. Vistar had a stellar fiscal 2023 and we are excited for its prospects in the coming fiscal year. Our Convenience business performed well in the fiscal fourth quarter, despite significant inventory holding gain headwinds. As we've discussed on past earnings calls, the Convenience segment will continue to experience one more quarter of higher than typical inventory holding gains. However, we feel confident in the underlying momentum of our Convenience business and its long-term prospects. Let's take a moment to discuss Convenience in more detail. After a successful entry with Eby-Brown in 2019, we then acquired Core-Mark in 2021, becoming one of the largest providers to the Convenience store industry. Today, we operate under one brand, Core-Mark, with a unified structure and vision to grow our share and leverage our Foodservice and manufacturing capabilities. The channel provides a significant opportunity for PFG, with a total addressable market of approximately $195 billion across the 150,000 outlets, most located within one to two miles of their customer base. This proximity has led convenience retailers to expand their store footprints and product mix, lessening their reliance on fuel and tobacco. We believe these trends play to our strength at PFG as we work to combine our convenience expertise with the vast foodservice resources to bring something exciting to the channel. Our efforts are paying off as we find ourselves engaged in foodservice discussions with over 30 small to mid-size chain operators along with countless independents representing thousands of retail store locations across the U.S. and Canada. Beyond our efforts at Core-Mark, we are also growing the channel through Performance foodservice, supporting advanced food concepts across convenience. The channel is evolving and foodservice is at the heart of that innovation. PFG is here to capture that growth opportunity. Our progress has been impressive, and we believe this is just the beginning. In closing, PFG had an outstanding fiscal 2023 and enters 2024 with momentum across our business units. We believe we are well positioned to continue our success in the market, particularly in the areas of our business that generate high profit and returns. Our exposure to a wide range of products, channels, and customer types provides resiliency in various economic scenarios. As presented in our guidance and long-term outlook, we are confident in our ability to produce strong results for the foreseeable future. I'll now turn the call over to Patrick who will provide additional detail on our financial performance and outlook.

Thank you, George, and good morning, everyone. This morning, I will begin by reviewing PFG's financial position and capital allocation priorities, and I will share some additional details about the operating environment. After that, I will go over our fiscal fourth quarter 2023 results and conclude with an overview of our outlook for fiscal 2024 and beyond. PFG concluded fiscal 2023 in a robust position, recording solid case growth and record net revenue, even with inflation slowing during the quarter. This led to a double-digit gross profit improvement year-over-year and an adjusted EBITDA that exceeded the upper end of our previously announced guidance range for fiscal 2023. Our business model has demonstrated resilience, producing strong results across our three segments, each showing areas of strength. We believe that our structure and unique channel exposure through Vistar and Convenience offers us a competitive edge. Notably, the high volume of consumer packaged goods sold by Vistar and Convenience helps shield us from some of the more volatile inflationary effects in the foodservice sector. Our Foodservice organization has performed excellently throughout the fiscal year, particularly in the fourth quarter when inflation turned negative. We do not foresee a prolonged period of deflationary pressure in Foodservice and have observed signs of stabilization in some categories, especially in proteins like beef and cheese. Nevertheless, we believe our Foodservice division can thrive in various scenarios, as reflected in the fiscal fourth quarter. This is evident in our outlook for fiscal 2024 and beyond, which I will elaborate on shortly. Let’s dive into specifics regarding our leverage, cash flow, and capital allocation priorities. Last year at our Investor Day, we outlined three key strategic priorities: consistent profitable top-line growth, adjusted EBITDA margin expansion, and leverage reduction. We have made substantial progress in all three areas, but I want to emphasize leverage reduction. As you're aware, our stated leverage target is 2.5 to 3.5 times net debt to adjusted EBITDA. By the end of the fiscal third quarter, we had reached the midpoint of that range, and this quarter, we further improved, finishing the fiscal year at 2.9 times net debt to adjusted EBITDA. I take pride in our disciplined approach to managing our balance sheet and believe we are now at a very comfortable level of leverage. What does this signify for PFG? Firstly, we will maintain our focus on leverage to ensure a healthy balance sheet moving forward. Our current financial status has also introduced additional flexibility in our capital allocation priorities. As indicated in this morning's press release, we initiated share repurchases during the fiscal fourth quarter as part of the previously announced $300 million share repurchase plan authorized by our Board last November. We plan to pursue further strategic share repurchases in accordance with market conditions. Additionally, we will continue to invest in growth through capital expenditures and technology enhancements. We have a track record of successful value-creating M&A activities and intend to remain active in this area if the right opportunities arise. We believe these activities will continue to generate long-term value for our shareholders. All of this is feasible because of the strong cash flow our business generates. Over the 12 months of fiscal 2023, PFG produced $832 million in operating cash flow. After accounting for approximately $270 million in capital expenditures, PFG generated $562 million in free cash flow over the past year. Now, let’s quickly review some highlights from our fiscal fourth quarter. PFG's total company net sales rose 1.9% in the fourth quarter to $14.9 billion. Our net sales performance resulted from about 2% organic case growth, with a notable 7.6% case growth in independent restaurants, and improvements in Vistar channels, despite lower year-over-year inflation. Total gross profit for PFG increased by 12% compared to the same quarter last year. Gross profit per case rose by $0.62 in the fourth quarter compared to the prior year period. In the fourth quarter, PFG recorded a net income of $150.1 million, with adjusted EBITDA increasing about 8% to $385 million. Total company inflation continued to moderate due to deflation in the Foodservice segment, with total inflation at 4.6% for the quarter. This deceleration was mainly driven by our Foodservice segment, which saw a 1.2% deflation in the fiscal fourth quarter. Inflation in the Vistar segment slowed but remained elevated relative to historical rates, growing at a low-teen level. Inflation in the Convenience segment also fell, dipping below 10% for the first time since last year's fourth quarter. We expect lower levels of inflation during fiscal 2024, which is factored into our outlook. We believe the tapering inflation rate is manageable, as indicated by the improvement in gross profit per case in the most recent quarter. Diluted earnings per share was $0.96 in the fourth quarter, while adjusted diluted earnings per share was $1.14. As noted in our earnings release, we provided guidance for the full fiscal year of 2024 and the first fiscal quarter. We will experience one more quarter of elevated inventory holding gain comparisons, which will then normalize by the second quarter of fiscal 2024. We expect net sales between $14.7 billion and $15.0 billion and adjusted EBITDA to range from $360 million to $380 million in the first fiscal quarter of 2024, notwithstanding the inventory holding gain comparison. Now, let’s review our specific targets for the full fiscal year 2024. We project net sales between $59 billion to $60 billion for the full year. Adjusted EBITDA is anticipated to fall within the range of $1.45 billion to $1.5 billion. We have also reaffirmed our long-term outlook, which includes net sales anticipated to be between $62 billion to $64 billion, and adjusted EBITDA between $1.5 billion and $1.7 billion in fiscal 2025. As George mentioned, our strong results in 2023, combined with business momentum for fiscal 2024, indicate the possibility of reaching the lower end of our long-term adjusted EBITDA range a year ahead of schedule, as suggested by our 2024 outlook. In summary, we are very pleased with our finish to fiscal 2023 and are optimistic about the upcoming fiscal year. We are making progress on our three focal areas: consistent profitable sales growth, adjusted EBITDA margin expansion, and lower leverage. The strength of our business performance, solid cash flow generation, and a healthy balance sheet have allowed us to initiate share repurchases, adding another value-creating use of cash for our shareholders. Our organization is executing our strategy effectively, and we believe we are well-positioned for continued success and value creation for our shareholders over the long term. Thank you for your time today. We appreciate your interest in Performance Food Group. We are now happy to take your questions.

Thank you. Our first question will come from Edward Kelly with Wells Fargo.

Hi, guys. Good morning and a nice quarter. Could we start with gross profit per case? Another quarter of good strong performance of gross profit dollars relative to case volumes. And this is with a little bit of deflation in the Foodservice segment, and obviously lapping the procurement gains. How do you think about the relationship of gross profit dollar growth versus case volume growth in 2024 with the continued deceleration of inflation? I know there's a lot of positive mix in the business. But, George, maybe could you just talk about how we should be thinking about that relationship?

The mix is the primary concern. Independent growth is doing well, while our national accounts are currently in decline, but I believe that will improve for the rest of the year. You mentioned tackling the inventory gains; these aren't necessarily additional cases sold, yet they contribute to gross profit. Our other businesses outside of Foodservice are experiencing similar trends. Vistar has performed excellently, and the contract feeding business is recovering strongly, especially in Convenience and micro-markets. Regarding our Core-Mark business, the tobacco sector has seen significant gains, and their ability to maintain good margins is largely due to their strong food business, which has higher margins. Ultimately, the focus is more on mix rather than increased sales from customers.

Okay. And then just as a follow-up. It's something that you guys seem to emphasize a little bit more on this call today. It's related to capital allocation. And you guys have been very good at M&A historically. Your stock is also trading, I think pretty close to a historical trough EBITDA multiple. You could buy more. Could you maybe talk a bit about how you're thinking about the trade-off of all of this, the value where your stock is today, your maybe appetite to do a bit more given where the valuation is at this point? And how you think about the opportunity of being strategic with M&A but also where the stock price is?

Yeah. This is Patrick. Thanks for the question. As you pointed out, we've talked about our capital allocation strategy multiple times and with our leverage goal of reducing leverage, and to that 2.5 times to 3.5 times and hitting the 2.9 times this past quarter, it gives a lot of confidence on how we're managing our leverage. And when we look at what we've projected outwards in the guidance for EBITDA and our ability to continue to pay down debt, we feel really good about where we are with our leverage. So that allowed us to really look at the fourth pillar, if you will, of our capital allocation strategy, which was to execute on that $300 million share repurchase program that the Board had authorized for us. So, as we just reported, we did have some activity this quarter. We look at this as very strategic, and we will continue, as I made in my comments, to strategically look at that and be in the market at the appropriate times based on several factors.

Okay. Thanks a lot.

And yeah, this is George. I want to add that we will continue to pursue acquisitions. We haven't been very active in that area recently, not due to lack of effort, but rather because of the current opportunities available. However, we feel very confident about future mergers and acquisitions.

Okay. Thank you.

Hey, George. I want to start with your thoughts on Foodservice growth. Sales force has been growing very rapidly. At some point, you'll reach a point where you'll need to evaluate that. What are your thoughts on the appropriate annual growth rate for the sales force? Also, when I consider drop size, it seems to be up or possibly flat due to inflation, and units have increased slightly. That still appears to be a significant opportunity. Looking ahead to 2024 and 2025, do you think we will return to a situation where account growth and drop size are equally important for achieving that 7.6% or 7%, 8% case growth? Do you anticipate this happening soon or will it be delayed?

Yeah, those are good questions. As far as the growth in salespeople, we've actually continued to take that up, particularly as we got into the fourth quarter of fiscal 2023. We've also been able to get where we have our growth as a company and independent is about equal to our growth in people. And we're about a point shy in growth of accounts as we are in sales. So I think those things bode well because we feel like we've got a good training system in place. We're going to get good productivity from these new people down the road. That's going to help fuel us there. And just having that increased customer base is going to give us more opportunity for penetration. And I would say, all in all, that there probably is some softness from a macro standpoint and I think when that comes back, and it will, I think that we'll get much better drop sizes. I think we have these things going in the right direction.

Okay. And then a follow-up. Maybe talk about the c-store pipeline, right. So we think about their growth or I think their growth in non-tobacco is still probably what, well into double-digits. If that's the case, when you sort of parse that out account growth versus their drops size, is their account growth the bulk of that, or is drop size a much bigger contributor?

We have seen significant account growth. While we don't have clear insights into the macro aspects regarding Convenience, we are optimistic about our business. Our Foodservice sector is expanding with double-digit growth, and we have a substantial pipeline of opportunities. Although the sales cycle is lengthy, we believe we are at a stage where we have several promising accounts in the pipeline, and we anticipate new business as current contracts come to an end. We are confident about this growth and will monitor how the macro situation evolves.

Great. Thank you for taking my question. Was curious if we could dig into some of that underlying momentum you talked about and maybe parse out the strength of new account wins and then wallet share gain opportunity, particularly on the independent side that you're seeing.

Well, I think that we're still somewhat dependent on new accounts, but we're doing a great job there. And where we've seen an uptick from Q4 to the beginning here of Q1, in our case growth, we've also seen a similar uptick in our new accounts or our total number of accounts versus the previous year. Wallet share is a little bit harder to tell. We do see that products that we were selling that customer a year ago and we're selling it to them now in most instances, there is a slight decline. So I would say, as I mentioned earlier, there are some macro issues out there and I think that we're going to continue to push through those as long as we're getting good people and we're training them well, and they're going out and getting new business. It's not that difficult. That's pretty simple math.

That's helpful. Thank you. And George, in your prepared comments, I think you mentioned or noted a pipeline of new business opportunities in the Vistar channel. Curious if you could dig into that a little bit more in terms of maybe new areas going deeper into current categories, anything that you're particularly excited about that we could be looking for on the horizon?

Our retail pick-and-pack business, where we fulfill orders for others, continues to perform well. Micro markets are growing rapidly. The theater segment is holding up surprisingly well, and for some time now, we’ve also seen an increase in office coffee as employees transition from working in the office a few days to four days a week. These areas currently show the most promise for growth. The value category, particularly in dollar stores, is also performing strongly.

Yeah, thank you. Good morning. I wanted to ask just about the performance brands. You've obviously kind of continued to see sales increase of those. I'm sure it's driven by kind of your independent case growth. But have you also seen kind of within existing accounts more sales of performance brands? Has the macro perhaps supported that side of the business?

Our brands are doing very well. And the business is almost entirely with independent customers when you look at our customer base in Foodservice outside of independent, it's basically restaurant chains. So we're doing little to no business with contract feeders in Foodservice or nursing homes or hospitals, those parts of the business, hotels. So we really build our product for restaurants. And where we're seeing the best growth right now is at the higher end of our products from a quality standpoint. So, that's really what's driving it.

Okay, great. Thanks.

Core-Mark has also been adopting these brands and is performing very well with them.

Yeah. I'll answer the second part first. When it comes to the CapEx, as we've always stated, that's our number one priority for our capital allocation is to continue to invest in the business. And as George was just describing, we're seeing great growth in independent cases. So we'll continue to invest for that growth as we've been doing. And then on the share repurchase, I would characterize it as we're trying to be very strategic. I mean, we look at a few things, I'm not going to go into too many details, but we do look at historic multiples and relative valuation to help guide us on when we should be in the market and how we should be in the market.

Hey, thanks. Good morning and congrats on the success. I wanted to ask on the independent case growth in the fourth quarter. I mean it was really strong and barely below the third quarter level, which I would imagine had some benefit of lapping Omicron. And I guess, just wanted to sort of dive in and just trying to see what the impact of that might have been and a little bit more view on the acceleration in the underlying case growth that you saw through the fourth quarter. And you talked about the strong trend into the first quarter, but just a little bit more on that step up?

Yeah, if you look at the last two quarters, just kind of stepping through the calendar, January was an unusually high-paced growth month and that had I think a lot to do with Omicron. We saw slightly less growth in February. And then slightly less growth again in March. And then as we got into the fiscal fourth quarter, the opposite happened where we actually gained momentum in each one of those three months and then gained more momentum in July, and actually, August so far has been better yet. So, I think, that in some ways that's like what the last three years have been like right. I mean, there's always been something that was unusual in each quarter and I think we've finally reached that point where although the industry may be a little slow right now, I think that it's more consistent and I think it will continue to be more the seasonal flows that we've typically had in the past.

Yeah, this is Patrick. I'll touch on that a little bit. Again, as we've mentioned before about our customer-first approach with our digital ordering platform, we are really pleased with the progress of the rollout. I believe Vistar has almost completed the rollout or has finished it, and we're making significant progress on the Foodservice side as well. We consider this to be very important. It's never meant to replace our sales force, which we view as a very strategic asset, as reflected in our independent case growth. However, we do see it as a tool that will enhance the way salespeople interact with customers and support them in their journey with PFG as they place orders, offering them a more seamless online ordering experience. We find a lot of value in this approach. Additionally, as we've previously discussed, we will eventually implement it across all three segments, allowing customers to cross-order into Foodservice if they're a convenience customer or into Vistar as they wish.

Good morning. Thank you for the questions. To begin, the update on the convenience business was very useful. It seems you are experiencing significant momentum there. From the start, you were optimistic about the cross-selling potential between Convenience and Foodservice. Now that you have been doing this for a while, how has it turned out compared to your initial expectations? Is the progress faster or slower than you anticipated, whether it’s Foodservice to Convenience or vice versa? Have there been any surprises regarding this aspect?

We would like to develop more quickly, but sometimes progress is better when it happens at a measured pace. It took some time, but outside of the Foodservice segment, there are actually two distinct businesses. Core-Mark has primarily focused on the store itself and consumer packaged goods, which represents a shift for them. However, the two companies are truly coming together. They have a strong pipeline, and we are observing success in both areas of the business. Our Foodservice team is performing well as they enter Convenience locations, which previously lacked the necessary assortment from Core-Mark. Initially, we handled those through separate means, but now we are effectively collaborating, and we feel optimistic about this trend. We believe this will contribute significantly to our growth in the near future.

Good to hear. And then just a quick follow-up, how close do you guys think you are at this stage to see normalized fill rates at both Vistar and Convenience?

Well, it's improving all the time. And I would say in our Foodservice business that things are if not normal, very, very close to normal. What we're finding in the Core-Mark and Vistar business is some of the lack of fill rate that we've had is items that were discontinued during COVID that have continued to be discontinued and in some ways are probably permanently gone, maybe it will still come back. So that's part of it. And the rest of it is somewhat unexplainable for us. We are frustrated that we don't have better fill rates, but we are also pleased that they're continuing to improve. And it's pretty widespread that they're not back to normal fill rates in those two businesses.

Hi, good morning. It's Kelly Bania here from BMO. Thanks for taking our questions. I was wondering if we could just talk a little bit about gross margin across the categories. So maybe, both within the quarter and as well as the outlook for fiscal 2024, which segments are contributing to gross margin expansion across Foodservice, Vistar, Convenience? And clearly, you've characterized the kind of temporary deflation as manageable within that. But the drivers of what support that being manageable, how much of that is mix or other actions you're taking?

Well, all three businesses, Foodservice, Core-Mark, Vistar have seen gross margin expansion. As I mentioned earlier, it's really mix. Mix is the biggest thing in all three of those businesses as to why we're seeing that growth. It's product mix, it's channel mix, and then the success of the brands. As far as just aggressive pricing, I would say that's probably not something that we've really done.

Okay. And within your outlook for fiscal 2024, we should expect continued mix and gross margin support from those dynamics.

We should. I guess if we picked up some large chunks of business in more of the national area that could have some impact. But the pleasing part of it too is overcoming these inventory gains that we had in fiscal 2022 and 2023. And, we actually, for fiscal 2023 by the end of the year, we had less inventory gains than we did in 2022. And this is the last quarter that we have to deal with that. And that obviously has helped drive some of this gross profit per case. And without it, we're still seeing good increases. But like I said, it's primarily due to mix.

Sure. And George, I would like to add that if you look at the trends we've observed over the past few quarters, there has been strong underlying performance across our various businesses. Therefore, as we look ahead to 2024, we anticipated these trends and used them to inform the outlook we provided.

This quarter has brought us the highest inventory gains we have ever seen. We are very confident in our ability, as indicated by our guidance, to overcome these gains once again. Then I won't have to discuss it, which will be quite nice.

Agreed. Can I just ask maybe one more because you have a pretty broad view of consumer trends given all of your different segments and end-markets. So, maybe can you just talk about what you're seeing with respect to trade-down, whether it's a trade-down among price points and case value or a trade-down among customer types? What you're seeing and what you're expecting as we move forward? Thank you.

If you look at the published numbers, quick service restaurants are outperforming casual dining and family dining. This may be partly due to consumers opting for lower-priced options. Our value offerings are performing well, and the trend of trading down seems evident. Walmart's success also indicates this trend. Interestingly, our higher-end products are experiencing the fastest growth among our independent Foodservice customers. Overall, the situation is mixed. In national accounts, casual dining appears to be less popular right now. It's unclear whether consumers are trading down to other options or choosing independent restaurants.

And Kelly, if I could just add to that, when you think about the diversification of our business, and we've talked about this at times about like a week in the life between the three different segments and all the different channels that we service, we really feel that if the consumer is trading down or trading up, we'll still capture those sales.

I know that our move into micro markets, which may have been challenging before, is performing well by offering different price points and a wider range of products, particularly at the higher end. It's a mixed situation overall, but Patrick pointed out that we operate in many different channels. While we are currently missing out on the fastest-growing segments like contract feeding and lodging from a Foodservice perspective, the other channels we are involved in and committed to are performing well.

Hey, good morning. George, are you receiving any support with the recent acceleration in independent case growth from drop size, or is it primarily due to the increase in new account growth?

We're getting a little bit from drop size, but the bulk of it is coming from accelerated new account growth.

Can you provide any insight into how sticky new customers are? With the macro environment being uncertain, I sense some optimism that it will improve eventually. However, from my perspective, it still feels uncertain. How much retention are we seeing from these new customers? Is this a positive factor as you develop your guidance? Considering we have many new customers and a significantly lower churn rate, does this increase your confidence in the top line despite the macro conditions?

Well, we keep real detail on lost business is very important. And every year, we've been able to get better at retaining our accounts and retaining our salespeople, both. And if you consider the amount of restaurants that typically go out of business each year, and we've been able to get to very high single-digit turnover from the previous year, and customers or lost business. So as we're adding accounts, we feel pretty confident. And particularly with the retention level that we have with our sales force. I think those two go hand-in-hand.

Got it. Thank you. And if I could just ask you as a follow-up on, I think your commentary on was kind of overall expense ratios were down when you combined driver and warehouse. But could I ask you to just unpack that comparison, but also how they're progressing each of them separately in terms of becoming more productive?

We are seeing ongoing improvements in productivity and reductions in shrinkage, which are significant challenges with new hires. We did hire extensively in certain areas, and we may have gone a bit overboard. Nevertheless, we believe we will continue to enhance our situation. We're not back to our 2019 levels, and we are investing more to ensure better service. The decrease in overtime has contributed positively to our productivity, and not relying on temporary workers as much as we did during the peak COVID times has been beneficial. We anticipate our expense ratios will continue to improve slightly. A considerable portion of the increase in expense ratios last quarter was due to the continued expansion of our sales team, which was our primary area of spending compared to the previous year.

Okay. And just a last one is a follow-up, I think your commentary on the convenience business was that the margins were good. And I believe that was in the context if you take out the holding gains. But I just wanted to double-check that, if I heard that right. And so again, were you really referring to more of the gross margin, or would the EBITDA margin have been substantially better if you take out the big, I guess, tobacco holding gain from the year ago period?

Yeah. If you took out the holding gains from the previous year, we were actually well into double-digit EBITDA growth for Convenience. And that was driven somewhat by food sales. I mean, that certainly helps. But from an operational standpoint, warehousing and delivery, from where we were COVID to now, they've probably improved the most.

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