Performance Food Group Co Q1 FY2025 Earnings Call

Good day and welcome to PFG's Fiscal Year Q1 2025 Earnings Conference Call. I would now like to turn the call over to Bill Marshall, Vice President of Investor Relations for PFG. Please proceed.

Thank you, Shelby, 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 2025 fiscal first 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 2024. 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. 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. It has been a busy beginning to fiscal year 2025 as we have built business momentum, particularly in our Foodservice segment, while closing two excellent acquisitions. This morning, I will discuss the early progress we have made on both Jose Santiago and Cheney Brothers and then review some highlights from our fiscal first quarter. Patrick will then discuss our financial results and outlook for fiscal year 2025. I will then provide some closing comments before taking your questions. We are proud of how our organization has performed over the past three months. Our three segments have executed our strategy very well and produced strong results. The consumer landscape has provided some challenges, but I am pleased to report that we have started to see signs of stability that we believe could put us on a solid foundation for the remainder of the fiscal year. Before getting into more specifics on our business, I wanted to say a few words about our acquisition activity. As we discussed in August, we acquired Jose Santiago early in the fiscal year. Jose Santiago is a leading broadline foodservice distributor in Puerto Rico, with good growth momentum and attractive margins. Over the past three plus months, we have worked diligently to integrate their business into PFG's Foodservice operations. This process has gone extremely well due largely to the hard work by the teams at both Jose Santiago and PFG. The team in Puerto Rico is proving to be an excellent cultural fit and has already contributed nicely to PFG's business results in the fiscal first quarter. In early October, we closed the Cheney Brothers acquisition. I'd like to thank the team at Cheney Brothers as well as PFG for the long hours put in to get this deal across the finish line. We are ready for the early close, raising $1 billion through the issuance of new notes during September, which allowed us to pay down a portion of our ABL facility and provided us with additional borrowing capacity to fund the acquisition. Patrick will discuss the financial details shortly. While it has only been one month since the close of the Cheney deal, we have already made a great deal of progress onboarding Cheney's organization. We welcome the roughly 3,600 associates from Cheney Brothers to PFG. The Southeast region representing the majority of Cheney's operations has experienced a difficult few months due to the hurricane activity. The focus of our organization has been, first and foremost, on the well-being of our associates. As a foodservice distributor, we also play an important role in the food supply chain. As an organization, we have been able to ship much-needed food supplies across the Southeastern United States and Puerto Rico. While it will take some time for these areas to fully rebuild, our businesses are fully operational and continuing to service our customers. I'm proud of the active role our company and associates played in assisting areas impacted by the storms. In addition to supporting organizations like the American Red Cross, Mercy Chefs, and World Central Kitchen, our associates stepped up to help each other and the communities where they live and work by volunteering to provide supplies, food, and meals to first responders and those impacted. Looking ahead, we are incredibly excited about the opportunity Cheney Brothers brings to PFG. As discussed in August, Cheney's operations complement our legacy business. Cheney's strength in Florida, particularly with broadline independent customers, enhances our existing business in the region, which skews more towards the specialty area of the business. The Cheney Brothers distribution facility in North Carolina rounds out the portfolio, providing us with additional scale across the Southeastern United States. Cheney Brothers' assets, particularly their distribution facilities, are exceptionally high quality and state of the art. It is rare to find an asset that is operating at scale but still has room to grow. Cheney's excess capacity should enable us to accelerate growth, build scale, and route density across the Southeast region. In August, we provided data showing the positive demographic profile of this region, which is available on our website. Cheney Brothers' high exposure to independent restaurants is reflected in constant sales growth, high profit per case, and EBITDA margin well above PFG's corporate average. At the same time, we believe that Cheney's relatively low private brand penetration provides a very attractive opportunity to enhance both top line growth and margins. Our legacy Foodservice operations have been incredibly successful at expanding our Performance Brands offerings to independent restaurants. In fiscal year 2014, Performance Brands represented just over 39% of independent brand share. In the most recent quarter, Performance Brands represented nearly 53% of total sales to independent restaurants. Many of you are familiar with the Reinhart acquisition and the value created from that transaction. Similar to Cheney, Reinhart was underpenetrated in private brands. But in the years since we have owned the operation, we have been able to expand Reinhart's private brand portfolio penetration to levels that are similar to legacy Performance Foodservice. We believe the private brand opportunity at Cheney is even larger. In fact, our integration strategy for Cheney is very similar to that of Reinhart. We believe we have acquired a very high-quality asset that is on an excellent growth trajectory. Our initial efforts were focused on integrating the organization while minimizing any impact to Cheney's associates, customers, and suppliers. Over time, we will share best practices across the two organizations and expect to accelerate sales and profit growth as a combined entity. Patrick will discuss some of our specific financial goals from the transaction in a moment. The Cheney Brothers transaction fits nicely with our total PFG strategy to continue to build upon a leading position in the food away-from-home space. Cheney is another high-quality growth asset in the foodservice space, and we are excited to add this organization to PFG. Foodservice is an important piece of the total PFG portfolio. However, what defines us are the additional avenues for growth, including Vistar and Core-Mark. The combination of these three units provides a powerful offering that we believe appeals to customers across the food away-from-home landscape. As our organization continues to grow both organically and through targeted M&A opportunities, PFG is increasingly a leader in the food away-from-home space. In late October, IFDA held its National Championship event in Orlando, Florida. The event honored some of the industry's safest associates, allowing them to compete in a range of skill competitions. PFG had a fantastic showing, including 95 associates and over 300 PFG attendees, including family and friends to support the event. PFG's associates accepted a number of awards across multiple categories within warehouse and transportation events. Four of our competitors' children were recognized for their essays detailing why their PFG parent was their hero. It's a great event and PFG is proud of participating in leading the industry forward. In October, our Core-Mark business displayed its strength in the convenience space at the National Association of Convenience Stores conference. Core-Mark's offerings, not only in traditional center of the store convenience, but in foodservice products tailored to the convenience landscape, set PFG apart. Our three segments are working together to create cross-selling opportunities that we believe will produce additional market share opportunities. Technology is an increasingly important part of our cross-segment collaboration and selling. One platform that we are particularly excited about is our customer-first digital ordering application. We began discussing this initiative at our June 2022 Investor Day. Since then, we have expanded the offering across the organization and are seeing excellent progress. At PFG, we believe that our sales force should always be at the frontline of our selling efforts, a key competitive advantage that has allowed our company to consistently gain market share. At the same time, we have continued to provide our sales team and our customers with the tools, resources, and knowledge to help them grow their businesses. Importantly, customer first will eventually be rolled out across all three business segments, allowing cross-selling opportunities that we believe will further enhance our value proposition. Overall, I am proud of our organization's performance and believe that we are well-positioned to continue executing our growth strategy. I'll now turn it over to Patrick, who will review our financial performance and outlook. I will then return with some final comments on our quarter and the business environment.

Thank you, George, and good morning. PFG is off to a strong start in fiscal 2025 with net sales results at the upper end of our previously disclosed guidance range, and adjusted EBITDA just above the midpoint of our previously disclosed guidance range. We are very pleased with the top line momentum, which has slightly accelerated early in the fiscal second quarter, providing a high degree of confidence in our 2025 outlook. Before discussing our fiscal 2025 plan, let's review some highlights from our first quarter. PFG's net sales grew 3.2% in the fiscal first quarter, a 1 point acceleration compared to the fourth quarter of 2024. Our top line performance remains balanced between volume improvement and net price realization. Total case volume increased 2.6%, including a 7.8% increase in total independent restaurant volume. Excluding acquisitions, our total volume increased 1.2% in the fiscal first quarter, including a 4.3% gain in our independent restaurant cases. As we enter the fiscal second quarter, we are seeing a slight acceleration in both total and independent case growth, which we believe is a reflection of our customers driving foot traffic and signs of stabilization from the consumer. Our total company cost inflation was about 5% for the fiscal first quarter. Foodservice cost inflation was 3.8% in the quarter, an acceleration from the end of fiscal 2024 due to double-digit year-over-year inflation in poultry and cheese. Cost inflation in the Convenience segment was 7%, consistent with the trends seen in the fiscal fourth quarter. Vistar's cost inflation continued to decelerate sequentially and was up 1.9% in the fiscal first quarter on a year-over-year basis. Inflation was slightly more than anticipated in the quarter, particularly in the Foodservice segment, but we believe we are well-equipped to manage the price volatility as a normal course of business. Total company gross profit increased 6.1% in the fiscal first quarter, representing a gross profit per case increase of $0.23 in the first quarter as compared to the prior year's period. We have continued to see excellent cost control once again led by an outstanding profit performance from Foodservice and Convenience segments. Both Foodservice and Convenience produced double-digit adjusted EBITDA growth in the quarter, increasing 13.8% and 11.2%, respectively. Vistar did see a modest adjusted EBITDA decrease driven by continued lower foot traffic in some of our customers' channels. The balance across our three segments displays our strong diversification strategy. We anticipate Vistar's results to improve towards the back half of the fiscal year. We expect to build upon these strong profit results as we move through fiscal 2025, which I will address in a moment when I review our guidance. In the first quarter of fiscal 2025, PFG reported net income of $108 million. Adjusted EBITDA increased 7.3% to approximately $412 million, above the midpoint of the guidance we announced last quarter. Diluted earnings per share in the fiscal first quarter was $0.69, while adjusted diluted earnings per share was $1.16, a 0.9% improvement year-over-year. Our effective tax rate of 26.5% in the first quarter was up slightly compared to the 26.1% rate in the last year's comparable period. Turning to our financial position and cash flow performance. In the first three months of fiscal 2025, PFG generated $53.5 million of operating cash flow. This includes a sizable investment in candy and tobacco inventory during the quarter, in anticipation of future potential price increases. We often invest in increasing the inventory of these two categories because of manufacturer pricing activity, which allows us to generate a holding gain profit. We believe that this is a very efficient use of our balance sheet and cash flow position, generating a high rate of return in future periods. We also increased our capital spending in the quarter to $96.5 million. We've been actively building new capacity in state-of-the-art warehouse facilities, as well as building our fleet to support our long-term growth. Some of the capital spending is a catch-up from delays in building and fleet purchases due to disruptions in the global supply chain following the pandemic. In fact, we expect over 10 new building projects to come online over the next 12 months. We believe these new facilities will not only support our consistent top line growth but also incorporate designs and technologies to provide long-term cost efficiencies. Our balance sheet remains healthy, supporting our capital projects and M&A activity. Our debt balances increased during the fiscal first quarter, reflecting the ABL borrowings used to finance the Jose Santiago acquisition, putting our leverage just above the midpoint of our 2.5 times to 3.5 times target range. As you know, we closed the Cheney Brothers acquisition early in the fiscal second quarter. As a result, we expect our net leverage to be above the top end of our target range when we close the second quarter. We expect to use available cash flow to pay down our ABL facility and bring our leverage back to within our target range over the next several quarters. We feel very comfortable with our debt balance at this time and have historically operated well above our current leverage. With that said, we believe our 2.5 times to 3.5 times target range provides future opportunities to use our balance sheet to finance reinvestment, including capital spending, M&A, and share repurchases. On the topic of share repurchases, during the fiscal first quarter, we paid $29.5 million to acquire 0.4 million shares of our company at an average price of $74.69. There is about $181 million remaining on the $300 million share repurchase authorization. While our share repurchase activity remains active, we may execute lower levels of buybacks due to the early closing of the Cheney acquisition, as we look to reduce our leverage in the short term. With that said, our share repurchases reflect several factors, including market conditions, our share price, and relative valuation, and we may become more active with our share repurchases, depending on those conditions. Turning to our guidance for fiscal 2025. For the full year, we expect net sales to be within the $62.5 billion to $63.5 billion range. We expect adjusted EBITDA to be in the range of $1.7 billion to $1.8 billion. We increased both our net sales and adjusted EBITDA outlook with the close of the Cheney acquisition early October. These ranges include estimated Cheney results representing approximately 12 weeks of the 13 weeks in the fiscal second quarter, and a full year's benefit from Jose Santiago. We feel very comfortable with our net sales and adjusted EBITDA targets and have become increasingly optimistic due to improving industry trends. For the second fiscal quarter of 2025, we anticipate net sales to be in a $15.2 billion to $15.6 billion range with adjusted EBITDA in a $400 million to $420 million range. As a reminder, the Cheney acquisition will only impact 12 weeks versus 13 weeks of the quarter's financial results. Our guidance includes the expected benefits from the Cheney acquisition that we discussed in August, notably $50 million in annual run rate synergies by the third full fiscal year following closing and accretion to adjusted diluted EPS by the end of the first full fiscal year, including year one synergies. To summarize, we are very pleased with our start to fiscal 2025. Our underlying business is on a strong footing, setting us up well for the future. Meanwhile, we have closed two excellent acquisitions since the beginning of the fiscal year, and both are expected to add nicely to our growth and margins. Our balance sheet is healthy, and we intend to continue to use our financial position to create shareholder value through reinvestment in our businesses, along with selective M&A, share repurchase activity, and leverage reduction. Our capital allocation decisions are always based on marketplace conditions, but at this time, we would expect to emphasize debt reduction due to the timing of the Cheney close.

As Patrick mentioned, we are excited about the future of our business. All three of our operating segments are executing well, despite a challenging external environment. Our Foodservice segment has continued to build market share and grown cases ahead of industry trends. Convenience continues to pick up momentum. Despite industry declines in Convenience, our business outperformed all major categories and was able to increase sales and profit nicely. And as we look out across the landscape, we are starting to see a better backdrop. Vistar continues to experience a challenging macroeconomic environment, but we are pleased with the progress they have made on several emerging channels, and are confident that they will resume the strong top and bottom line momentum that we are accustomed to seeing. As we look across the landscape, we are pleased to report that over the past few weeks we have seen an uptick in our volume performance, particularly in independent restaurants, and expect our fiscal second quarter to improve sequentially. Keep in mind, we experienced a very strong December in fiscal 2024, but as we enter the back half of the year, we are increasingly confident that we will experience an acceleration in our top and bottom line trends. Our results, both with our underlying businesses and the new opportunities that Cheney and Jose Santiago are due to the hard work of our associates across the country. I believe we have some of the best talent in the foodservice industry, and I'm confident that we will continue to build upon our position as a leading foodservice distribution company in the United States. Before opening the line to take your questions, I wanted to take a moment to recognize Pat Hagerty ahead of his upcoming retirement. Pat has been part of the Vistar organization for over 30 years, most recently serving as PFG's Chief Commercial Officer. Pat has been an integral part of our company's success for decades. In 2008, he was named President and CEO of Vistar and went on to shape that organization into what it has become today. From the time Pat took the helm at Vistar through the end of fiscal 2024, the organization has expanded into a number of new channels, growing the top line by over 240% and become the highest margin contributing segment to Performance Food Group's bottom line. I would like to personally thank Pat for his decades of service and dedication to our organization. I wish him the best in retirement. 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'll take our first question from Mark Carden with UBS. Your line is open.

Hi, good morning, guys. Thanks so much for taking the question. So to start, just on the sales force, are you guys seeing much of a normalization on your pace of hires at this point? And has compensation for these hires shifted at all just given the tough macro? Thanks.

Yes, we've been fairly consistent with the growth of our sales force. We're running in the 5% to 6% range, and that's about where our growth has been running of late. So we feel good about what we're doing there and really no big changes from a compensation standpoint. Our people are commissioned salespeople, so they, to some degree, write their own paycheck.

Okay, great. And then just in terms of on your independent case growth, obviously, it picked up a little bit from July. It sounds like you exited the quarter on a high note. How did that play out throughout the quarter from a cadence perspective? And then, are you seeing any surprising pockets of strength or weakness from a category standpoint, just within your business?

Yes. We're seeing a 1 point to 2 point increase better than we ran in the first quarter so far, but I want to caution that the second fiscal quarter last year for us, we had 8.7% independent case growth and December was 10.9%, a strong kind of party season, and the calendar fell very well, as far as the amount of time between Thanksgiving and Christmas. So that said, each week actually has gotten better since we've gotten into the second quarter. So we're real confident and particularly confident about the back half of the year, and we're continuing to add people. We would like to get a little bit above that range we're at right now, that 5% to 6% and more into the 7% plus increase in salespeople, and we're determined to get there. We just have to find the right people.

Thanks so much.

Thank you. We'll take our next question from Kelly Bania with BMO Capital. Your line is open.

Good morning. Thanks for taking our questions. George, I was wondering if you can just kind of elaborate on the signs of the stability. I mean, you talked about a little acceleration here, I think, it sounds like with independents, but can you maybe go channel by channel and what you're seeing in consumer behavior, what you think is changing? And then, I just had a quick follow-up with respect to Cheney, if we have time.

At this point, I am unsure how much of our growth this quarter is due to our improved performance versus the market conditions. We will have a clearer picture once we receive our market share data. Our ability to gain share in the independent sector has been quite steady, although the overall market has declined, estimated at about 3% compared to last year. Reflecting on last year, the second quarter was particularly challenging, especially in January. We anticipate better growth as we progress further. Regarding the sources of our growth, it has not come from casual dining chains, as many are struggling. Some fast food chains that we supply have performed better, especially those at the higher end of the quick-service restaurant segment. Our independent business also leans towards the higher end. However, the bottom 20% of the income bracket seems to be facing challenges. The more price-sensitive quick-service restaurant chains continue to struggle when comparing this year's performance to last year's.

Can you talk a little bit about Convenience and Vistar on the same note?

Sure. There seems to be an adjustment happening in the Convenience sector due to price increases. Consumers are accustomed to these increases, as we've noted before, with a 5% inflation rate, which we still consider high. I believe consumers are adapting to this situation. Currently, we're experiencing mid-single-digit same-store sales declines in that area. Regarding Vistar, we're facing some challenges in the theater segment, primarily due to softness in that market and some competitive pressures. In retail, we've observed similar trends, particularly with decreased traffic and value stores struggling more than others. Additionally, we've seen several account closures where we previously engaged in impulse buy sales at cash registers, especially in value stores, which have experienced significant closures.

That's helpful. And just wanted to ask about Cheney and the integration timeline. Has anything changed with how you approach integrations of acquisitions of that size? And I guess, particularly, I was wondering if you had any color on the cadence of the synergies that you expect kind of year one, year two, year three.

Yes. Well, the integration, I guess it depends on how you define integration, but we're doing our best to only do the things that we need to do. We put them through a lot, as you can imagine with due diligence. They spent some long hours. We're just getting the integration done that we need to get done, I guess, as a public company probably would be a good way to put it. And then as far as synergies, I think a lot of those will develop in the second and third year. We don't look at getting synergies from the people part of the business. They're running intact and that's what we want. They're doing very well, by the way. I know it's only one month, but their sales growth has been really pleasing. And a lot of it will come from brands as we mentioned, but with those brands, first of all, we need to figure out what brands they have today that we would adopt as a company and consider them to be our brands. And then, as we offer the product up to them, it's their decision as to whether or not they use our branded products. And that typically takes time, but no different than a Reinhart situation or a Core-Mark or a Merchants. We'll get the synergies. They may come quick, they may come slow, and I mean that. It could be either way. It just depends on what they want to adopt, and what's more important than when we get those synergies is how the company continues to perform as part of our company. And sometimes you can get so focused on getting those synergies that it has a negative impact on the company. And going from a private company where they can pick up their cell phone and call the owner and have a conversation to being part of a large public company, we want to make that as seamless as possible for the people. So, we're not overly focused right now on synergies, but we're very confident that those will develop.

Thank you.

Thank you. We'll take our next question from John Heinbockel with Guggenheim. Your line is open.

Hi, guys. I want to start with the 10 new buildings, right? So can you sort of talk through what segments they're in? Are they net new facilities? Are they replacements, automation, right? And have you been capacity constrained, not from a salesperson standpoint, but from a physical standpoint?

Yes. We have physical constraints. That is for sure. We don't necessarily have 10 new buildings, okay? We have one that's a replacement building. We have several that are additions to existing buildings. Where we have these projects going up, they're almost all in Foodservice. We do have a new distribution center for Core-Mark, which will be in Houston, Texas. And I might have to turn to Pat on this. I think that's the only one we have that is not Foodservice.

That is a Vistar expansion.

Okay. And then we have one replacement building and several additions to existing buildings. Most of our projects are in Foodservice, and we also have a new distribution center for Core-Mark in Houston, Texas. I might need to turn to Pat on this, as I believe that's the only one we have that is not related to Foodservice.

I want to make sure we're clear with this. So we have 10 what we would call major projects going on, but not 10 new buildings.

Got it. And then maybe the other thing, right, you had good success, I think, over the past six months in all three segments of picking up a chunky business, right, I guess, non-independent. What's your outlook here, right, for the next, I don't know, six months to 12 months or 18 months along those lines? Similar opportunity in those three and in particular, right, Core-Mark, I know there's chunky stuff out there in RFPs. How do you size that over the next year or two? Is it potentially much bigger than what we've gotten recently?

We have plenty in the pipeline. We typically don't respond to RFPs. We have a couple within that segment that we are. We would be showing some excellent growth in Core-Mark if the same-store sales weren't as negative as they are. So we're feeling very good there. We have business that we've already signed that we have coming in that we're not shipping yet, and we're experiencing double-digit growth in the Foodservice part of not only our Core-Mark business but of the business that we do in the convenience stores out of Performance Foodservice, and they've come a long way.

Thank you.

Yes. Our pipeline in Foodservice is also fairly good, but our focus right now is heavily on the independent customer. We've got some great national account customers that are new. We're continuing to be in conversation with people, but that part of our business, we do have some accounts that are showing some pretty serious declines. And I think it's great that we've been able to overcome that.

Thank you, guys.

Thank you. We'll take our next question from Lauren Silberman with Deutsche Bank. Your line is open.

Thank you very much and congratulations on the quarter. I wanted to ask about the EBITDA guidance. You increased it by about $100 million for Cheney inter-quarter. I think it was closer to $159 million on a trailing twelve months basis. Is there any change in your expectations for the core business? Is there a degree of conservatism regarding Cheney expectations? Any additional insight would be helpful.

Yes, Lauren, this is Patrick. Thank you for the question. Regarding the increased guidance, your figures are accurate. We anticipate about 38 weeks of Cheney, and we have strong confidence in the core's performance. As we discussed, we've had a solid Q1 and have seen good progress in key metrics like independent cases since then. It’s still early, as we just closed Cheney about a month ago. As George noted, the early numbers are promising, and Jose Santiago is performing as we expected. Overall, we are feeling more confident as the year progresses, and we believe the guidance range we provided offers sufficient flexibility on both ends.

Yes, I want to make a comment on that as well. At the time that we put that guidance out, we were dealing with a hurricane and another one came after. And that's basically had some effect on the entire distribution area for Cheney. So, I thought it made a lot of sense for us to be cautious about that. They are performing extremely well, and we'll be looking at our guidance as we go through the year very closely. We also have this to deal with as far as we're seeing our growth accelerate and we had such a big December last year, as I mentioned earlier. So, we're trying to be cautious about that, but as these weeks have been clipping down, we've just seen continued improvement, and we haven't seen much of an impact on Cheney from these hurricanes. They've done really well all the way through it. So, we'll keep looking at this. We'll continue to be cautious, but we'll update our guidance when we find it to be appropriate.

Very helpful. Appreciate that. And then, just a follow-up on the private-label penetration that you discussed. So, PFG is at, I think, 53%. Where is Cheney running currently? And just looking at Reinhart as a read-through, where was Reinhart when you first acquired it relative to where it's running now?

Reinhart's situation is distinct from Cheney's, so I won't spend too much time on this. Reinhart has increased their penetration by about 10%, moving from the low 40s to the mid-40s. We've maintained a significant portion of their portfolio and incorporated it as our branded products. Over time, they've made considerable strides in our product offerings. With Cheney, we currently can't determine their percentage because we haven't finalized which brands we will adopt. Recently, Craig Hoskins, Joe Davi, and I attended a food show and identified several products that could align well with our company. We're committed to collaborating with them, but it's essential to note that it's their decision regarding which of our brands to adopt, and our OpCo, Performance One, has to decide on the brands stocked at Cheney. We need to clearly understand their inventory and what we wish to present, as it's important not to overwhelm the situation. They are understandably proud of their brand offerings, and we want to maintain that. As for specific numbers, I can't provide that right now. By the time of our next call, you can ask again, and we'll have a clear answer.

Great. Will do. Thanks a lot. Appreciate it.

Thanks.

Thank you. We'll take our next question from Alex Slagle with Jefferies. Your line is open.

Great. Thanks. Good morning. As a follow-up, I don't know if you could comment on the magnitude of the impact from the hurricanes if there was any. It sounds like you were pretty happy with how things progressed. And then just on Cheney, how fast that closed, which was faster than we expected, were there certain dynamics that allowed for that or how did that play out?

Well, if you look at our position particularly in Florida, we've stayed pretty specialized. The bulk of our business in Florida is pizza business, and then chain business, and there's other parts of the country we're pretty cognizant about kind of sticking to what we can do well with our current facilities and our current position in the marketplace. And I think that led to us being able to get this done quickly. And then, as far as the impact from the hurricanes, it has been very little. Now, we're putting the numbers together as far as the number of accounts that we totally lost, and it's fairly substantial, but what often happens is it just helps the average unit volumes for the people that are still open because the biggest impacts are right on the coast, that tends to be a higher percentage of independent restaurants versus chain restaurants. So, we're seeing it greater in the independent world. Not material though, surprisingly, not material. They just did a great job of working their way through this.

Got it. And the cheese inflation, what's your visibility look like on that for the year ahead, and if there are any potential implications, cheese, or I guess, anything else?

Cheese is still inflated over the previous year, but sequentially, cheese has been going down for, oh, God, a couple of months now, sorry.

Thanks.

Thank you. We'll take our next question from Andrew Wolf with CL King. Your line is open.

Thanks, good morning. This question first is for George. Just looking at the two acquisitions combined, Cheney and Jose Santiago, it's not as big as Reinhart, but they're big and it approaches that in size. So, in a general sense, do you see these as similar to be sort of a catalyst for growth, both market share and otherwise in the way that Reinhart was?

Yes, I see both of them as being very good impactful acquisitions. If you put the two together, it does represent more EBITDA than Reinhart did at the time. Now Reinhart, the EBITDA has doubled and I don't expect that to see that happen. These are more matured from an earnings standpoint. And actually, Cheney is very similar EBITDA margins that to what we have and what we call our full broadline companies, very similar, but there is a big difference, and that's that they've been a better grower than some of our big companies have been. I think that the other impact that we'll get from Cheney, and that's why it could prove to be the best one that we've done in spite of the incredible earnings growth that Reinhart has put out is, I think it's going to have a great impact on our existing distribution centers in that area. We'll run them as kind of two separate go-to-market, but we do now have the opportunity to broaden our offerings in the distribution centers that we have that overlap with them. And we have a lot of experience in overlapping, not as much experience where we purchased someone that was bigger than us in the markets, but we had some of that in Reinhart. The Upper Midwest was a weak area for us. Reinhart did extremely well. We've coexisted and with slightly different brand offerings and very different total product offerings. And I think that's the same thing that will happen with Cheney. We will coexist, we'll add at least one more Cheney distribution center, and I just have just great feelings about where Cheney is going to head for us. Great management team. Going to their show, I was shocked at how many people that I met there that I've worked with in the past, so that are currently at Cheney. So I think they, to some degree, know us and we know them and it's going to be a good mix.

Thank you for that information. Patrick, I wanted to inquire about your capital expenditures, specifically regarding the ten projects in various phases. Last year, you increased your capital spending to nearly $400 million, and now it's around $200 million. This indicates that some of that spending is going towards these projects. Can you provide insight on what the capital expenditure budget looks like moving forward? Will it remain close to $400 million?

Yes, Alex, thanks for the question. You're right. We did ramp it up a little bit last year. I'm sorry, Andrew. I apologize.

No worries.

I apologize. Yes, we did increase our spending last year. These projects are all multi-year, and some of them are a result of delays in construction after the pandemic, where sourcing materials and labor was challenging. We're seeing significant improvements in that area lately, which is encouraging. This has contributed to some additional expenses as these projects progress more quickly. We anticipate that these costs will gradually decrease over the course of the year. As we’ve mentioned, there are numerous growth opportunities across all three segments, particularly in Foodservice. We will continue to assess each of our locations to determine if expansions are necessary or if new buildings need to be constructed. While I don't want to overstate it, we are incorporating automation where it makes sense in these buildings, and we are developing more advanced facilities when we start new projects, which enhances our operational efficiencies. We consider various factors when deciding to add or expand our facilities.

Got it. All right. So, one of the takeaways there is the increase in the run rate spending, some of it's catch-up, but there's a lot of opportunities. So, all right. I'll work with that. Thank you.

Thanks, Andrew.

Thank you. We'll take our next question from Jeffrey Bernstein with Barclays. Your line is open.

Thank you very much. I have two questions. The first pertains to the current trends. George, it seems you are becoming more optimistic about fiscal 2025, noting some positive trends in recent weeks. I assume this optimism is already considered in today’s guidance, suggesting you are not expecting additional upside. However, I want to clarify something. You mentioned that independent case growth was at 7.8% in the first quarter, and it seems like there has been an acceleration in the fiscal second quarter, likely indicating higher single-digit growth. That said, you also mentioned that your growth aligns with the sales force, which is around 5% to 6%. I'm trying to understand the differences in these figures regarding your outlook for independent case growth going forward. Will the sales force growth increase, or will independent case growth decrease? How should we interpret these comments? I also have a follow-up question.

Well, yes, our current organic independent growth is between 1% and 2% above what we achieved in Q1, and it has been accelerating each week, showing slight improvement. This gives us some confidence. However, we’re aware that the comparisons will become more challenging as we approach the end of November and December. On the other hand, January presents much easier comparisons unless we experience extreme weather. This makes it difficult for us to make precise projections. As for the growth in the sales force, it is currently around the same as our growth, in the 5% to 6% range. This is based on our performance so far in fiscal Q2, excluding Cheney and Jose Santiago.

Got it. So perhaps I was exaggerating, I guess. Independent case growth of 7.8%, you're saying if you just looked at the organic component of that, what would that number be?

4.3%.

You're seeing a 1% to 2% increase from that 4.3%, which would put you in a good position.

Correct.

Thank you for the clarification. Regarding the cash usage outlook, Patrick, you mentioned that with Cheney, your leverage exceeds 3.5 times. I'm curious if you can quantify that and the timeframe to return to the 2.5 to 3.5 times range. It sounds like you indicated a couple of quarters, but I'm unsure if that means you'd be within that range by then. Last quarter, you stated you planned to utilize the remaining $181 million in share repurchase authorization by the end of fiscal '25. Should we now expect that, as you concentrate more on debt, you might not fully use that authorization this year? How should we view that cash usage and leverage level?

Yes, as I mentioned, our leverage level is above 3.5 times. I indicated several quarters ago that we would aim to return to that 3.5 times or lower leverage. Regarding the share repurchase, since we closed Cheney in October, which was earlier than we initially expected, our primary focus will be on reducing debt, so we will likely see less activity in the share repurchase program as a result.

Got it. And just to clarify for fiscal 2025, do you give interest expense and G&A guidance? I know the interest expense caught us a little off-guard, but obviously, you got moving pieces with your leverage levels. So, any directional color on interest expense and G&A for '25?

We do not provide guidance, but the current situation with interest expense is largely due to financing Jose Santiago, which was more than balanced by EBITDA and capital leases. Alongside investing in buildings, we have also been investing in our fleet, which is reflected in capital leases that contribute to interest expense, along with overall borrowings. Regarding depreciation, it is fundamentally linked to growth, mainly driven by the new buildings that are coming online, and those are the primary factors influencing these expenses.

We should assume what we saw in the fiscal first quarter as more of a reasonable run rate going forward, or was there some unusual that drove that higher?

No, we're experiencing a somewhat similar situation with the buildings and fleet. There were some backlogs due to the availability of tractor-trailers and units. We are seeing the supply chain improve now, leading to larger deliveries. This will result in a catch-up, and then it should taper off again.

Thank you.

Thank you.

Thank you. We'll take our next question from Brian Harbour with Morgan Stanley. Your line is open.

Thanks. Good morning, guys. Real quickly, you commented on cheese, but is your food inflation outlook any different for this year? Do you think it's more towards kind of the higher end of what you spoke about?

No, food inflation was slightly higher this quarter, but we are already seeing it decrease a bit. I expect low single digits for food, similar for Vistar, while Convenience will likely be a bit higher, probably in the mid-single digits.

Okay, thanks. And Vistar, I know there's kind of sort of year-over-year margin pressure. I don't know if that was partly the business that was acquired or the kind of the channel mix that you alluded to. Could you sort of talk more about that, just with regards to margin progression, and also kind of what you think drives some of the improving sales trends in the second half?

Yes. It's a lot to do with channel mix and also just the consumer trends that are out there and working with our customers. And so, that's what's driving some of the margin pressure with Vistar. What we see in terms of even the balance of this quarter, but going into the second half is that they are going to see some recovery in theaters. We mentioned that was one of the things that was softer earlier. And then going forward, we do believe that they have a lot of things they're working on. They have a lot of potential new channels that they're exploring, new customers, and that's what's going to drive their improvement in the back half of the year.

Yes, I should comment on that a little bit too. We're experiencing mix change with that business. Our Green Rabbit business is quite high on the gross margin area because we don't take possession of a lot of the product that we sell, and that's a business that we're real serious about. We like to get distribution centers such that we can get to almost all the country in one day. So, that's another one of those things down the road here that we'll be spending some more money on. Our theater business has been weak, but that is the lowest gross margin business that we have in Vistar, and the value business that has been weak. Our gross margin is okay on it, but the gross profit per case because the case cost is so low is also on the low-end of what we do in Vistar. So there's a whole lot of noise going on with it, but the mix is always going to have an impact there.

Thanks.

Thank you. We'll take our next question from Edward Kelly. Your line is open.

Hi. Good morning, guys. I was curious on the Convenience business. Could you maybe talk a little bit about your ability to grow EBITDA in that business on the decline that you're seeing in case volumes? And then, how do you think about the outlook for the rest of this year, if volumes are going to remain soft, the drivers to potentially continuing to grow EBITDA if that's possible in that backdrop?

I don't have a clear prediction, but I can share my thoughts on our direction. Our ability to increase EBITDA despite slow sales growth has been driven by our business mix. Our Foodservice segment is performing strongly and operating at a higher margin. Conversely, our tobacco business is facing a decline that is roughly twice as severe as previous years. This is partly due to the end of the COVID period when volumes remained steady during the height of stay-at-home orders, and now there's a bit of catch-up happening. Looking ahead, we have new business opportunities on the horizon. We're seeing improvement with our independent operations in the Convenience sector and in Foodservice as well. I believe volumes will recover as customers adjust to slightly higher price points. The only potential challenge is that while we've made significant strides in improving our expense ratios and productivity in both warehousing and delivery, future comparisons won't reflect the same rate of improvement as last year. Overall, I anticipate continued success in growing EBITDA, with future growth being driven more by business expansion rather than cost reduction.

Great. Just a follow-up on independent case volumes. So, it seems like momentum in the business is improving. Just curious as to how you think about getting back to that 6% to 10% organic independent case volume growth. I mean, you do have that tougher December compare, but we're coming off an election and then comparisons look like they get quite a bit easier as you get into the back half of this year. Just curious as to how you're thinking about that target, George?

Well, the way I model it out, okay, which is a little bit back of the envelope, but last year, we hit our 6% just barely, and it was front-end loaded. And this year, I see us getting to that. Again, it will just be a little bit more back-end loaded. But of late, I have developed a lot of confidence that 6% to 10% because we don't have that much ground to make up and we're experiencing some nice increases.

Great. Thanks guys.

Thanks.

We'll take our next question from Peter Saleh with BTIG. Your line is open.

Hi, great. Thanks for taking the question. George, I wanted to ask if you could elaborate a little bit more on the digital ordering tool, how broad-based it is today, maybe the penetration and adoption today, and what you're expecting as you go through 2025 or fiscal 2025 and just some of the benefits, if you can highlight some of those, that would be helpful. Thank you very much.

Yes, I'm going to just give you a couple of comments, and I'm going to turn that over to Patrick. He's a little closer to it than I am. We continue to see a higher percentage of our Foodservice independent customers that want to enter their own orders. We were probably a little late to the game as far as getting the right digital program in place, but we feel real good about what we're doing. And if you go to our other businesses, they're getting close to having everybody on the system. So, it's really been beneficial for us. It saves some time for the salespeople. We make sure they're still out there and still doing their job, and it's really been helpful in our Vistar part of the business. So, with that, Pat, I'll have you give maybe some better numbers.

Yes, I'll provide some additional details. We track our progress in various ways. First, we are transitioning away from older legacy systems across all our segments. Additionally, we monitor how many new customers, who were not previously ordering through some of our platforms, are now utilizing the platform. We are very pleased with the results. Particularly with Vistar, they have nearly achieved full conversion and are waiting for some extra features to be added so they can convert the remaining customers who were traditionally using the old system. They are also attracting new customers every day, which is encouraging based on the downloads we're seeing from the mobile app. Similarly, in the Foodservice segment, they have excelled at converting independent customers who were ordering through our legacy systems. They are also seeing success with other regional and national clients, with more adopting the new system every day. We anticipate that Convenience will go live with their platform, which focuses on the customer, in the first quarter. The key difference is that Convenience is adding some new capabilities that are not yet available in the Vistar foodservice platform. Overall, we are very happy with the progress. Customer feedback has been overwhelmingly positive, and we will keep enhancing our capabilities based on input from customers and our sales team.

Can I just follow-up? Does Cheney have its own digital ordering tool, or will they be adopting yours?

They have their own. They're somewhat similar to us in that their salespeople control a good bit of the ordering process. But today, just to give you how wide the difference is, I've recently had conversations where I've talked to a salesperson who 100% of his orders come in through the digital program generated by the customer, and we have several that it's 0%. So, our salespeople have little different go-to-market strategies. What I see over time is a slow but steady adoption of the customer using the system and placing their order digitally.

Thank you very much.

Thank you. And it appears that we have no further questions at this time. I will now 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.

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