Good day, and welcome to PFG's Fiscal Year Q2 2024 Earnings Conference Call. I would now like to turn the call over to Bill Marshall, Vice President, Investor Relations for PFG. Please go ahead.

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 2024 fiscal second quarter results, 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 results in the same period in Fiscal 2023. 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. 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 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 share our fiscal second quarter 2024 results with you today, which were strong and accelerated into the close of the calendar year. Building on a strong start to our fiscal year, second quarter results came in at the high end of the expectations we announced three months ago. Once again, we saw broad strength across our business units with strong momentum in our high margin focus areas. This morning, I will review our business performance and discuss some recent trends we have seen in the market. Patrick will review our financial performance and outlook for the remainder of the fiscal year. Then we look forward to taking your questions. Last quarter, we discussed our strategic focus on being a leader in the food-away-from-home industry with broad exposure to a variety of channels and products. We believe that our position in the market produces consistent growth across our top and bottom lines and provides resiliency during different economic conditions. The second quarter was an excellent example of this with each of our business segments contributing to our performance. Let's begin with our Foodservice segment. We are pleased with how Foodservice continues to perform with accelerating case volume growth across both independent and chain restaurants. The outstanding case performance drove sales growth in the quarter despite another period of modest deflation. We'll provide more detail about our inflation expectations in a moment. Independent case volume accelerated from the fiscal first quarter, growing 8.7% year-over-year in the second quarter due to a very strong finish and favorable calendar. We have consistently grown our market share in the independent restaurant space, which remains an important component of our long-term profit growth aspirations. The increased headcount within our sales force is certainly an important factor. However, I cannot overstate the quality of these individuals and the hard work they contribute to PFG every day. Their performance is supported by our Company's rigorous training, emphasis on product knowledge and the development of relationships. PFG has been building and maintaining this area of our business for decades. In our view, this emphasis is a key driver of our independent performance, and we expect this to provide continued momentum in the quarters ahead. As we have discussed on the past several earnings calls, new account growth has been the main driver of case growth in the independent channel. This largely continued in the fiscal second quarter with active independent customers increasing by nearly 8% over the prior year. However, we did begin to see improved penetration within existing accounts, particularly in November and December. In fact, sales to existing customers increased more in December on a year-over-year basis than we have seen since January of last year. We are optimistic that growing business with our existing customers will become a more important piece of our case growth trends. Last quarter, we highlighted the sequential performance of our Chain business, and we're optimistic that we could see positive case growth over the next several quarters. We are pleased to see that Chain business continue to accelerate sequentially, swinging to positive case growth in the fiscal second quarter. The growth in our Chain business was mostly driven by improved performance of our existing customers with a small contribution from new accounts. As you are aware, we have produced several excellent results in our Foodservice business despite several quarters of deflationary pressure. Sequentially, deflationary pressure moderated in the fiscal second quarter compared to the fiscal first quarter as we had expected. While the moderation was slightly less than we had originally anticipated, our strong case performance and positive mix shift offset the deflationary pressure, resulting in gross profit improvement in the quarter. As we turn our attention to the back half of 2024, we continue to expect moderating deflation turning to very slight inflation by the time we reach the end of the fiscal year. We are extremely proud of how our Foodservice business has performed. I believe it will continue to be the engine for our profit growth over time. Turning to Vistar, we were very pleased with results in the fiscal second quarter. Vistar is an important growth engine for our Company and has consistently produced strong top and bottom line results. As we discussed on last quarter's earnings call, Vistar did have a difficult comparison in the fiscal second quarter due to higher than typical inventory holding gains last year. They were able to successfully overcome this hurdle and grow bottom line results in the period. One of Vistar's strengths is the ability to compete in a wide variety of channels selling a broad range of products. This diversity helped once again in fiscal second quarter, allowing the segment to produce high-single-digit sales growth. Vistar saw particularly strong sales results in the important vending, office coffee, and office supply channels. One of the key drivers of the top line performance was a continued improvement of fill rates, both inbound and outbound. As you may remember, Vistar's fill rates have been slower to recover than our Foodservice business, and we are pleased to see gains in this area recently. Vistar has continued to enhance their e-commerce platform, which we believe will offer further growth potential in this channel, enabling us to increase sales to existing customers as well as open new lines of business directly to consumers. Vistar has a strong pipeline of new business, and we are excited about the future. Finally, our Convenience business has powered through a difficult macroeconomic environment to produce very strong bottom line results. On the topline, our Core-Mark operations continue to win new business and outperform the broader convenience landscape, particularly in the largest and most important channels and particularly in the foodservice, candy, and snack areas of the Convenience business. While topline growth is not quite as robust as we might like, Core-Mark has shown their ability to win market and take share from competition. We believe that inflationary pressure, both inside the convenience store and at the gas pump, has kept consumer demand muted over the past several quarters. Over time, we expect this to normalize and allow topline trends to revert to historic growth rates in the convenience space. Meanwhile, Core-Mark has done an outstanding job capturing efficiencies on the operating income line, particularly in workforce productivity. Core-Mark's operating expense efficiencies are attributed to record low temporary worker and overtime expense, which has decreased by approximately half from Q2 of 2023. A stable full-time workforce has several long-term advantages including fewer picking errors, lower levels of shrink, and higher worker productivity. As a result of these efficiencies, the Convenience segment experienced 20% adjusted EBITDA growth in the quarter. This profit performance is despite lower inventory holding gains on a year-over-year basis. Through the remainder of fiscal 2024, we anticipate inventory holding gains to moderate to a normal level. Still, our Convenience segment's profit momentum is strong due to the excellent management of underlying cost items. Core-Mark's ability to deliver both traditional convenience store goods as well as broad line foodservice expertise and capabilities has enabled us to capture additional business opportunities since the acquisition. We have expanded our capabilities to incorporate additional branded concepts, including various cuisine types, such as Hispanic, fried chicken, and barbecue. We have used the strong brand equity in several of our performance brands, including Contigo, Perfectly Southern Fried Chicken, Red Seal Pizza, and Tru-Q Barbecue. We believe that these programs help to drive our strong sales pipeline and expect them to result in additional business in years ahead. Before turning to Patrick, who will discuss our results and specific drivers for our performance and then provide more color on our guidance for 2024 and beyond, I want to leave you with a few key messages from our second quarter results and expectations for the future. We believe that PFG's position as a leader in the growing food-away-from-home market will enable us to consistently grow our sales and profit over the long term, resulting in additional shareholder value. Our commitment to invest in new fiscal capacity and customer-facing employees has produced market share gains in the highly profitable channels in which we compete. Our broad channel exposure gives us access to significant white space opportunities that we believe insulates our business from changes in the external macroeconomic climate. We are excited for what the future holds and appreciate your interest. I will now turn it over to Patrick.

Thank you, George, and good morning, everyone. I'd like to start this morning by reviewing our performance for the fiscal second quarter of 2024 and commenting on PFG's financial position and capital allocation priorities. I'll then review our outlook for the remainder of fiscal 2024 and discuss some key drivers embedded in our guidance. We'll then be happy to take any questions you have during the Q&A portion of the call. As you saw in our press release this morning, PFG delivered strong results during the fiscal second quarter. Building on the momentum from our first quarter, we were particularly pleased with how we closed the calendar year during the important holiday selling season, which experienced accelerated growth. In the fiscal second quarter of 2024, PFG generated total net sales of $14.3 billion, a 2.9% increase year-over-year. Our revenue was at the upper end of the guidance range we laid out last quarter, and we are very pleased with this result. Our sales performance was driven by a 2.1% increase in total case volume growth. Our case performance was boosted by an acceleration in independent restaurant case growth, which increased 8.7% in the quarter. This result was more than a full percentage point higher than the prior two fiscal quarters, highlighting the solid momentum in this area of our business. As George mentioned, we attribute this strength and resulting market share gains to our investment in our growing outstanding sales force. I'm also pleased to report that case volume to chain restaurants grew in the fiscal quarter after several consecutive quarters of decline. As we discussed in our last earnings call, our chain performance had improved sequentially as a result of improvements in some of our key accounts and new business wins. It is rewarding to see this area of our business move back towards positive growth, creating a powerful combination with our independent strength. We expect to continue to add new accounts to our Chain business, emphasizing profitability as we partner with strong and growing restaurants. Total PFG gross profit increased 6.6% in the fiscal second quarter to $1.6 billion. Positive mix shift continues to drive gross profit growth and margin expansion for PFG. While deflation in Foodservice moderated in the second quarter compared to the first quarter, it remains a modest headwind. Our gross profit performance in the quarter once again reflects our ability to produce solid profit growth despite the deflationary backdrop. Total company inflation increased slightly in this fiscal second quarter due to moderating deflation in the Foodservice segment that I just mentioned. This offset the slowing rates of year-over-year inflation at both the Vistar and Convenience segments. Total company product cost inflation was 3.6% in the fiscal second quarter, up half a percentage point sequentially from the fiscal first quarter. Deflation in the Foodservice segment moderated to 0.4% in the fiscal second quarter, compared to 2.3% deflation in fiscal Q1. As expected, Vistar inflation continued to slowly trend lower in the quarter, though it remains elevated compared to historic norms. Vistar finished the second quarter with inflation just below 7%. The Convenience segment is experiencing a similar dynamic with 7.5% inflation in the fiscal second quarter. Looking ahead, we continue to expect Foodservice deflation to move toward inflation by the end of the fiscal year, with Vistar and Convenience inflation settling in at a more normal low-to-mid-single-digit range. These are the assumptions in our fiscal 2024 guidance. Gross profit per case was up $0.29 in the second quarter as compared to the prior year's period. Our ability to increase gross profit at this rate is an important factor in our bottom line growth. You will see in our earnings release, our operating expense did increase at a mid-single-digit pace in the fiscal second quarter. This increase is mostly due to higher personnel expense and an increase in insurance costs. Higher personnel expense is partly a factor of our larger workforce to match our increase in demand. These increases were partially offset by increased productivity. We expect these improvements to continue in future periods as we steadily capture opportunities to become more efficient, particularly in the areas of warehouse and delivery. In our second quarter, PFG reported net income of $78.3 million, a 10% increase year-over-year. Adjusted EBITDA increased nearly 12% to $345 million. Our adjusted EBITDA result was at the very top end of the guidance we provided last quarter. Diluted earnings per share in the fiscal second quarter was $0.50, an increase of 8.7%, while adjusted diluted earnings per share was $0.90, an 8.4% increase year-over-year. We did see a higher effective tax rate in the fiscal second quarter of 29.9%, which is due to an increase in non-deductible expenses and state and foreign taxes as a percentage of our income. Turning to our guidance. For the fiscal third quarter of 2024, we expect net sales to be in the range of $14 billion to $14.3 billion, and adjusted EBITDA to be in a range of $310 million to $330 million. Keep in mind that fiscal third quarter is typically the smallest quarter in our fiscal year due to relatively light industry volume in January and February. A couple of thoughts on the assumptions we have applied to our fiscal third quarter outlook. First, as expected, the Foodservice segment continued to experience mild deflation in the fiscal second quarter. We continue to expect this deflation to move towards flat during the fiscal third quarter, although the pace of this improvement may be a bit slower than we originally anticipated. Second, while we closed out our fiscal second quarter with significant momentum, bad weather in early January resulted in an impact to our volume and sales results. Typically, January is a very small month, so we do not believe that the weather will result in a significant impact to our full third quarter. However, we are mindful of the slower start to the calendar year than we originally expected. Despite these challenges, we are reaffirming our full year fiscal 2024 guidance. We continue to expect net sales to be in the range of $59 billion to $60 billion and adjusted EBITDA to come in at the upper end of our previously announced $1.45 billion to $1.5 billion range. We're currently tracking sales at the lower end of the $59 billion to $60 billion range, though we do expect to have a strong fiscal fourth quarter. We’re also reiterating our long-term outlook which projects net sales to be in the $62 billion to $64 billion range in fiscal 2025. Adjusted EBITDA is expected to be comfortably within the $1.5 billion to $1.7 billion range in fiscal 2025. As you can see from our outlook for the next two fiscal years, we are confident in PFG's current trajectory and believe that our business is on solid footing. I'd like to conclude our prepared remarks today with our financial position, including our cash flow generation, balance sheet, and capital allocation priorities. Over the first six months of fiscal 2024, PFG generated strong operating free cash flow. Operating cash flow was $554 million in the first six months of fiscal 2024, an increase from $424.5 million over the first six months of fiscal 2023 due to improvement in our working capital and higher operating income. After investing about $147 million in capital expenditures, PFG generated $406.9 million of free cash flow. Investing in our business remains the top priority, including growth projects to build additional capacity to support our long-term growth aspirations. After capital expenditures, we have three main uses for our additional cash flow, including M&A, leverage reduction, and share repurchases. We evaluate these decisions based upon the value we see each would create for our shareholders and strategically deploy capital towards this view. Our share repurchase program considers the value of our stock as well as the relative evaluation compared to historic levels. In the fiscal second quarter, PFG repurchased 0.8 million shares for a total of $50 million for an average cost of $58.01 per share. We are confident in our long-term prospects and reflect this through share repurchases. We also continue to look at strategic M&A as another avenue of shareholder value creation. We are proud of PFG's track record completing and integrating acquisitions throughout our history. The team is continuously working to identify interesting opportunities while remaining disciplined on price and strategic fit. Finally, we have focused our efforts on maintaining a healthy balance sheet. We closed the quarter just below the midpoint of our 2.5 times to 3.5 times net debt to adjusted EBITDA target and feel very comfortable in this range. We also carefully consider the balance between fixed rate and floating rate debt and used interest rate swaps to convert a portion of our ABL balance to a fixed rate. At the close of the fiscal second quarter of 2024, 80% of our total outstanding debt was at a fixed rate, including these swap contracts. We believe that our current level of debt provides ample flexibility to fund our ongoing operations while leaving room for the capital allocation priorities I just highlighted. To summarize, PFG finished calendar 2023 with a strong fiscal second quarter. We believe our business is well-positioned to achieve strong results despite changes in the macroeconomic environment, and we are investing in the long-term success of our organization and our shareholders. Thank you for your time today. We appreciate your interest in Performance Food Group. And with that, we'd be happy to take your questions.

And we do have our first question from Jake Bartlett with Truist Securities.

Great. Thank you so much for taking the question. My question was on the cadence of the sales and the EBITDA guidance in the third quarter and the fourth. You mentioned weather, but you also mentioned that it wasn't going to have very large of an impact given how small January is. So the question is, what gives you so much confidence that sales growth will accelerate in the fourth quarter? By my math, it's about 6% growth at the low end of guidance in the fourth quarter, up from roughly 2.5% to 3% in the third. So, what gives you confidence in that level of acceleration?

Well, momentum in our independent business is a big help. We have new business coming in our national account area that starts anywhere from the beginning of the fourth quarter and some of it starts in May, and the same in our Core-Mark business. We have some new business that we've already signed up and we know is coming in. So, those are the things that give us confidence as we get into the fourth quarter.

Okay.

And, Jake—

And then, sure. Thanks.

Oh, sorry. I was just going to add, what we're really trying to do is make sure that we give you guys some clarity on the cadence of Q3 to Q4.

Got it. But the third quarter is impacted by weather but not by much. Is there any way you can kind of quantify how much you've seen in January? How much of an impact do you think January was to the quarter as a whole?

Well, January was a significant impact. It was a slow month. We're glad to be doing this quarter having a week in February under our belt; once we got past the bad weather, which was really just California, things were right back to normal, and our case growth was back to normal. So, we've got nine weeks to make up for a difficult four weeks, but we want to communicate that it does have an impact on our third quarter. But March is so critical to Q3 that we don't have full insight into what impact it would have on us. January is always a low EBITDA month for us.

Great. I appreciate it. I'll pass it on. Thank you.

And we do have our next question from Mark Carden with UBS.

Great. Thanks so much for taking the question. So, I wanted to dig into Convenience a bit. You mentioned that you're taking share there both overall and in Foodservice; still cases in Convenience Foodservice were down. I'm curious if this would have been positive if you include the Foodservice sales that are embedded within your performance Foodservice business? And then—

Yes. It would have been a 6.3% case increase if you include the Foodservice.

6.3?

Yes.

Okay. Great. Are you seeing much of a change in consumer behavior as gas prices have moderated a bit?

I think it's too early to tell because it's pretty recent that we've had that moderation, and we've had the weather component to deal with there. Historically, we're going to see some positive impact from that. Where we're seeing the softness is one large account that is very soft. And the Monday and Friday morning traffic is still not quite back to normal. I think it's because a lot of people aren't working a five-day week or going into the office for all five days. But other than that, we see some good success. Convenience has a long sales cycle, which I've mentioned several times. In general, Foodservice branded programs are typically fairly long contractual arrangements, maybe three years and sometimes five years. With our turnkey programs like Perfectly Southern Fried Chicken or Tru-Q Barbecue, those types of programs, where they're not doing something like that, we get in quick. Where they have to change out signage and they're doing that with somebody else who maybe had a three- or five-year agreement, sometimes those are going to be six months to 12 months before they're actually up. But what we do is we keep track every month of how many new programs we've signed up, and we feel real good there. Even in January, when it was difficult to get those things done, we did sign up a significant amount of customers. So our Foodservice business and the Convenience business—we're real pleased with where we're at at this stage.

Okay. Great. And then as a follow-up, just you talked a bit about the potential for strategic M&A. You mentioned recently that Foodservice would likely be the primary focus there. Just anything that you've seen recently that would make you any more or less optimistic about the volume of potential deals? And then if you did add within Foodservice, did you have any order of preference just between bolt-ons, category additions, or white space, or is it simply what's going to have the highest return?

We're always looking at white space. That's important to us. We've spent a lot of time on capacity in the West Coast or the whole West, actually. If you look at our Company from a broad line standpoint, west of the Mississippi, we really only have one, and that's in Northern California, and that's actually our smallest broad liner in the country. So when we get our monthly share information, which we think is fairly accurate and includes all the large players, our shares are very low in the West and very high in the East and continue to get better in the East. So we need that capacity in the West, and we're adding capacity as opposed to acquisitions where we feel like maybe acquisitions won't be available. There are other potential ones that we have. We don't really look at bolt-ons or hold-ins; it's just not something that makes a lot of sense for us right now.

Got it. That makes sense. All right. Thanks so much, and good luck, guys.

Thanks.

And we do have our next question from Edward Kelly with Wells Fargo.

Hi. Good morning, guys. George, maybe could we start on the independent side? Obviously, you saw a nice acceleration in independent case growth. Strategy is clearly working there. It does seem like there's a good competitive backdrop as maybe intensifying a bit just from the standpoint of the amount of focus there is on driving independent case growth. Can you just talk about what you're seeing competitively? And then looking forward, how do we think about the right pace of growth for this business for you over time? I think it was in 2019 you talked about 6% to 10% growth that was kind of a target for a long time. Is that a reasonable target as we think about the coming couple of years? Just thoughts there would be great. Thank you.

We'll start with the competitive nature of the business. I think it's always been very competitive in independent. I've never seen a time where it wasn't. As far as being more competitive than normal, I don't really hear that from our people. So I would just say that it's a very competitive business and it's as competitive as ever right now, but not necessarily more so. As far as pace of growth, I think the 6% to 10% is something that we still want to hang our hat on. We're doing that right now with in excess of 7% new customers, and we're doing it with about an 8% increase in salespeople. We're starting to lap last year when we got busy post-COVID adding salespeople. So that number is probably going to come down as far as year-over-year. But as these people gain more experience, they're doing better, and we look to having a higher case growth than we have growth in salespeople. But 6% to 10% is still something that is ingrained in our people. We're not at a point where we want to back off from that.

And just as a follow-up, you mentioned this in the Convenience business, this notion of elasticity and the demand disruption that's caused by the inflation. And I have to imagine that we've seen that probably across business; there's been a lot of pricing in all of these businesses. Pricing is easing generally. Do you think that the industry has an upcoming benefit coming from normalization of underlying demand as inflationary pressures normalize? You've been putting up very solid growth, obviously, in a backdrop where I don't think the industry is growing very much.

What gives us confidence is the share reports that we get. That's what gives us confidence going forward: we're doing a better job of gaining share. I mean, it's a tenth or two-tenths more than the previous increase in share that we had the prior year, but that's meaningful given the size that we are and our relatively low starting share in some markets. As far as pricing goes, I think a lot of people overshot with pricing and to some degree, I don't blame them. They were facing a lot of issues with food inflation and not just food, but rents going up, utilities going up. What we're seeing now is a lot of people are not backing off on their menu prices, but there's just a lot of promotional activity going on. Another sign that things are starting to calm down: January in our Vistar and Core-Mark businesses are typically a time where people increased prices, and they certainly did a year ago January. This January, a lot of people did not take their normal price increase, and we saw a step down in inflation from December to January—more about prices not going up this year rather than prices coming down. I don't see people reducing their menu prices. I think they'll hold where they're at now and promote heavier.

And just quickly for you, George, you mentioned an improvement off the soft January on weather. Any additional color there?

It was a normal week for us as far as percentage increase over the previous year. January certainly was not. There's another factor: the calendar really helped us at the end of Q2, particularly the last week, and it hurt us the first week of Q3. So that's another factor. Now, it's a very low volume week anyway. When you spread that over 13 weeks and certainly over 52 weeks, it's not material. I don't see any change in the industry. When you look under the numbers, things look fine. I think the demand is still out there.

Great. Thank you.

And we do have our next question from Kelly Bania with BMO Capital Markets.

Good morning. Just wanted to follow up a little bit on Convenience. George, I think you've talked about 6% growth there if you include the cases that go through Foodservice. I'm assuming that's mostly just foodservice-type product, correct me if I'm wrong.

It is entire.

Okay. But can you talk a little bit about the appetite for chain and independent convenience stores to make that transition, and you talked about the turnkey programs. But in this cycle where maybe there is a little softness, what is that appetite to make that transition? And then can you also elaborate on the new business wins you sort of touched on?

I think the appetite is high. The tobacco side of their business is going to continue to slide, and they have to have something to replace those gross profit dollars. Foodservice is a great way for them to do that. I'm enjoying watching how many of these programs get into places that didn't do foodservice before where they're finding space in that store that isn't giving them the return it used to and putting Foodservice product in to take its place. Typically, there's equipment involved and signage, so it does take time. As far as new business goes, we have several things starting in the next six months. Often you have to wait for a contract to end. In some instances, the current supplier has been notified and in some they haven't. We don't talk specifically about any piece of business, but we have great confidence in our future growth within our Convenience area.

Okay. That's helpful. Maybe I'll tack on another one on Vistar here. I think you said inflation was just under 7%. So it looks like maybe cases were slightly positive. Can you elaborate on the channels that are growing or not, and just how you think about case growth for Vistar into the back half?

Kelly, this is Patrick. On Vistar, the channels where we saw some really nice growth in Q2 were vending, office coffee, and office supply. Theater was a relatively soft quarter for them with not a lot of content out there. As we go into the back half of the year, they had a strong quarter given the comparison to inventory gains last year. We don't expect that going forward, but the channels that we see growing are likely to show positive growth for the balance of the year, including theater as we get into March and later in the year with some new releases coming out, and vending should pick up quite a bit too.

And I would also add that our e-commerce business is doing very well.

Thank you.

And our next question comes from Alex Slagle with Jefferies.

Hi, good morning. Wanted to touch on the Chain business and the optimism that case growth will pick up. Is this mostly a function of your customer mix, or are there signs of broader strength in full-service casual dining where they're flexing marketing and value in this environment?

We have accounts in our national account mix that have not done well for quite a while. We've seen a bounce off the bottom in some, and we have some that are on a great growth path. That mix coming together resulted in aggregate growth, which was nice to see. We had a little new business come in and we have more that starts next month and more that starts in May. So we'll be putting out pretty good national account case growth, and it's all in the restaurant area.

Got it. As a follow-up, the positive mix shift across products and customer types has been a tailwind. Where do you have the most confidence in seeing these positive shifts continuing and are there certain corners of your business that might emerge as bigger or smaller drivers in the future?

I see our independent Foodservice business continuing to grow well. I have great confidence around our Foodservice business into Convenience. E-commerce is definitely a strong point for us. The mix story has been our story for 20 years: we grow better in areas that produce higher margins. Excluding when we've made some big acquisitions with different mix, I think that's going to continue. We like national account business and have great customers, but that's not going to be what drives our gross margins; some of that business is efficient and profitable, though.

And Alex, I'll just add because George brought up those turnkey programs going into Convenience, like Perfectly Southern, they have huge potential for us.

We've got strong brands we've developed; it took a while. The product has to hold up longer than what you typically sell to a restaurant because it's not immediate consumption. We did a lot of work and we're pretty much through that. We see this as a good growth engine for us.

That's great. Thank you.

And our next question comes from Brian Harbour with Morgan Stanley.

Thank you. Good morning. Is the weather impact in January more significant in any one of your three segments? For instance, does Convenience feel it more or is it mainly Foodservice?

It was most significant probably in Foodservice, but Convenience was very close to that. Vistar, not so much.

Understood. In Foodservice, growth in gross profit and growth in operating expenses were similar in the most recent quarter. Do you think you can see more operating leverage in that segment going forward? Is that a function of where you are in the hiring cycle or what will drive the growth rates of those two lines?

We see productivity has improved. Core-Mark, which was affected a lot during COVID, came back the fastest operationally and has done a terrific job. The hiring of salespeople meant we carried a big payroll of people who were not on commission for a period of time; we'll cycle through that. It was a good investment. There's also capacity we've added; opening new facilities has a learning curve and brings higher expenses for a period of time. From an IT standpoint, we've invested heavily and we're on the path to get to one ERP—a slow path because it comes with disruption and we're careful. Those areas have increased expenses. Insurance is another factor.

Yes. I'll just jump in on that. We have seen some higher OpEx, but we were able to grow gross profit faster, which produced margin expansion at the EBITDA line. Regarding insurance specifically, we are a high-deductible insured company. We have third-party insurers that cover everything above the deductible with some limitations, but for the deductible, according to GAAP, we established an accrual. There have been market dynamics, and this quarter that expense was a little higher than expected. It has to do with miles driven, industry incidents, and the severity of those incidents. We don't expect that we would have that additional expense going forward at the level we saw this quarter. It was a bit of a catch-up and we expect to manage it going forward, though some things are beyond our control, like industry trends.

When you look at the quarter we reported, with the insurance headwinds and the inventory holding gains we had the previous year, it was quite a quarter for us where we were up against a lot, particularly on inventory within Vistar. We couldn't be more pleased.

Thank you.

And we have our next question from Joshua Long with Stephens.

Great. Thank you for taking my questions. Encouraged to hear about growth on the new account side and reengagement of existing customers to drive wallet share penetration. Could you talk a bit more about that?

When you look at account-level detail, there are certainly more restaurants. These spaces are filling up and it's rare that a restaurant that goes dark doesn't get replaced by another restaurant. Our penetration within accounts appeared lower than normal for us; typically we can add SKUs to existing business and that wasn't showing up initially. At the end of the month when we run reports on SKUs, what we're finding is we're adding SKUs with customers that were buying 14 cases of french fries a week last year and maybe buying 11 now. I think it's because there's more competition out there and more units open. That will settle back in. Another factor helping sales at the account level is that customers reduced days and hours during labor shortages; we're seeing that start to go the other way where they're adding hours and going back to six- or seven-day weeks. That's another change from the pandemic gradually returning to a normal state. The fact we're still adding SKUs tells me as the industry normalizes there's upside to dollar and case penetration within those accounts.

Great. Thank you. Recently you announced a product partnership on the premium dessert side. Is that a one-off or should we expect more opportunities to add options and elevate product quality in Convenience and overall value proposition?

If there's an area that'll do more of that, it'll probably be Convenience. The arrangement we did is with a high-quality manufacturer; we're ensuring for our specified product they use their products so we can market their brand alongside ours. It's not necessarily a one-off, but it's not a new broad strategy either.

Got it. Last one: micro markets. Can you provide an update in terms of how the end customer is moving toward building out micro markets as offices normalize and return-to-office dynamics change?

Micro markets continue to grow. Technology gets better and less expensive. They allow for broader selection—refrigerated, frozen, hot, and multiple SKUs and categories. The operators Vistar works with sell micro markets into office spaces and can expand what they've had in the past. They create new spaces or replace old vending banks with micro markets; it's a net positive because of all the additional SKUs and categories they can add.

We've also seen places where employee cafeterias were shut during COVID and reopened as micro markets. That's great for us because we don't play in most of the non-commercial areas of our Foodservice business.

Thank you.

And we have our next question from Jeffrey Bernstein with Barclays.

Great. Thank you very much. Two questions. First, you mentioned strong and accelerating sales growth to close fiscal Q2 and that January was impacted by weather. Besides weather, are you seeing any change in the macro in your Foodservice accounts, or do you think it's purely weather? Some have talked about a slower macro in recent weeks—how do you decipher between weather and a slow macro?

We only have one week coming out of the weather, and that week was very normal. That's a good sign, but it's only one week. In Q2, at the end of Q2, we were helped by having a five-day ship week versus a four-day the previous year, which helped the end of the quarter. I don't really see a difference now; it's hard to say three weeks from now. Right now, we look at January as a weather-related impact.

That's encouraging. Second: during COVID, many said there were about 10% fewer restaurants. For a while it seemed those boxes weren't filling and there wasn't a net recovery in units. You mentioned it sounds like empty boxes are filling up. What's your sense of recovery back to prior peak restaurant counts?

That's hard to tell. In my travels I don't see many empty restaurants any longer; I probably wouldn't have said that even six months ago. I think they're filling up. Looking at our number of accounts, we're ahead of 2019 in number of accounts, particularly independent restaurant accounts. For the health of the industry, I hope we don't get overbuilt again. I think we're in a pretty good spot.

Lastly, on the independent segment, you mentioned sales force up 8% year-over-year. Some peers are also aggressively adding. Are you finding incremental challenges in finding good labor or increased turnover that make it harder to pursue the same strategy?

I don't think the market is any more competitive now than it has been. The large players will benefit, and our challenge is to benefit more than the other guys. It's a good industry and it's continuing to consolidate. I think there's a lot of room for many players in this business.

Thank you.

And we have our next question from Lauren Silberman with Deutsche Bank.

Thank you. A couple on guidance. You said the fiscal year is tracking at the low end of the $59 billion to $60 billion range. Is this entirely driven by lower inflation than expected? Is anything else different than expectations?

Lauren, it's a little due to that and also because deflation in Foodservice has been a little slower to move the direction we wanted. It is moving correctly but hasn't turned inflationary as soon as we had expected. That didn't change things dramatically but did impact us a bit. We've also touched on the January weather effect.

The big one for us from a deflation standpoint is cheese, particularly cheese that goes on pizza. We over-index in that area due to the way we run our business, where many of our customer agreements are tied to the block market. Often we've anticipated price increases and deflation and managed inventory accordingly. But cheese is an area where the inventory age is important and we've been taking losses as cheese prices declined. We have seen a few weeks in a row where the block market has gone up, which will be positive if that continues or stabilizes. Another part is cigarette volume, which typically declines about 4% a year but recently has been higher. Cigarettes are big dollar sales with low profit but they're necessary to be in the business. I think that's about it.

Clarifying the second half cadence, the fiscal third quarter—are you embedding a return to normalized seasonality as you reiterated the full year guide, versus idiosyncratic impacts in Q3?

Yes. We're trying to give cadence to the quarters so you can understand the cadence we're seeing. It's much more of the former than the latter.

Last one: fiscal 2025 guide—fiscal 2024 comes in at the low end of the fiscal 2025 guide. How should we think about fiscal 2025?

We feel really comfortable coming in around the midpoint of that guidance. We continue to see positive things and that's why we reiterate that guidance.

Thank you.

And our next question comes from Andrew Wolf with CL King.

Good morning. You commented that penetration with independent customers is improving. Could you elaborate on what parts of the sales process are being applied as a differentiation—are there pricing algorithms, or is it more training and product knowledge?

We don't have pricing algorithms. We train our people and equip them with the best product knowledge possible, which enables them to add SKUs to accounts. It's essentially persuasive selling and showing up.

Regarding better operating expense in Convenience distribution, is that better performance relative to the other segments, or are they just catching up in hiring full-time staff?

They are really performing well operationally; they're the best they've ever been at putting out high levels of service. They're paying people well and getting good productivity. They were hit hardest during COVID and came back the fastest; they returned to pre-COVID levels and continued to improve. We have business coming on and we need to be prepared; I think we're in great shape.

To add, speaking specifically to the warehouse, the type of worker we have to hire, especially in Foodservice, we refer to as an industrial athlete—they have to be very physical. On the Convenience side, often they're picking eaches or small packs so it can be a less demanding job and therefore a slightly easier hire for us. That has helped drive OpEx lower.

On service rates and customer expectations: can Convenience be more aggressive given lower excess labor, or are customers less tolerant of lower service levels?

I would say almost the opposite. Convenience customers don't have back stock, so if we're not making deliveries and providing great service, they'll have empty shelves. They need a high service level.

Got it. Thank you.

We are seeing some improvement on inbound and suppliers' fill rates. For whatever reason, the Convenience and Vistar suppliers have not been able to get service levels back to pre-COVID, while Foodservice suppliers have returned to pre-COVID fill rates.

And we do have our next question from Peter Saleh with BTIG.

Thanks. To come back to operators adding hours and days, is this a more recent trend seen in the fiscal second quarter or has it been going on for several quarters? Also, any comment on daypart mixes—are lunch or dinner performing differently, and any cuisines outperforming?

The trend of adding hours seems tied to how markets got labor back, and that's different market by market. As far as cuisines, third-party delivery has expanded delivery beyond pizza and Asian food and has benefited many restaurants that do takeout and delivery. Product conducive to takeout and delivery benefited compared to pre-COVID, but it's not as high as during COVID. Pizza saw some fatigue and is cycling back. Breakfast has come back strong, likely due to more people working in the office; breakfast is habitual and has made a nice comeback.

Thank you. On the Monday and Friday softness, are you expecting that to improve in calendar 2024 as return-to-office trends continue?

Yes, definitely.

And our next question comes from John Heinbockel with Guggenheim Securities.

I wanted to start with Vistar. You referenced in the release the impact of an acquisition, which I think was GreenRabbit. Patrick, is the impact on the P&L a near-term weight? And George, strategically, what's GreenRabbit's impact on Vistar and the fulfillment business—what does that do and can it move the needle?

Thanks, John. There are a couple of things in the quarter. We've added the acquisition and that shows up in OpEx. Also, the gross profit looks muted because of inventory gains in the prior year versus this year. If you strip out those inventory gains from last year and the acquisition, Vistar's gross profit to OpEx continues to grow about double. So there's noise from the acquisition and inventory comps, but we're comfortable with how Vistar is performing.

Strategically, we've been in e-commerce for a while. We were doing it out of several of our Vistar facilities and moved to semi-automated centers. They are expensive—around $30 million each. We spoke with GreenRabbit; they have three distribution centers. Two are smaller than ours and one is quite large and handles refrigerated and frozen, which we don't do in e-commerce currently. For us, it increases our footprint to six e-commerce centers and adds expertise from GreenRabbit's team. Some of their centers don't take physical possession of all products, which helps margins since we don't carry cost of goods on those sales. This is a big part of our future within Vistar.

Great. One quick on Foodservice: would you still characterize that business as a high-single-digit EBITDA growth business assuming independent case growth of 6% to 7% and some chain growth? We haven't reached that because of sales force investment—do we get back there in early fiscal '25?

We have eight distribution centers that are strictly restaurant chain distribution centers so they don't have the same profitability as our broad-line facilities. We know the business and margins. Where we're not full broad-line, margins are lower. We want to continue investing to get independent growth back to pre-COVID levels. I see our Foodservice business becoming more profitable over time in terms of return on sales, though mix and acquisitions can affect comparisons.

Thank you.

We have no further questions in the queue. That will conclude our Q&A session for the day. I will turn it back over to Bill Marshall for closing comments.

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

Thank you. That does conclude today's teleconference. Thank you for your participation. You may now disconnect.