Performance Food Group Co Q3 FY2025 Earnings Call

Good day, and welcome to PFG's Fiscal Year Q3 2025 Earnings Conference Call. I would now like to turn the call over to Bill Marshall, Senior Vice President, Investor Relations for PFG. Please go ahead.

Thank you, and good morning. We're joined today by George Holm, PFG's CEO; Patrick Hatcher, PFG's CFO; and Scott McPherson, PFG's COO. This morning, we released a press statement regarding our fiscal third quarter results for 2025, which are available in the Investor Relations section of our website at pfgc.com. Throughout this call, unless noted otherwise, we will be comparing results to the same period in fiscal 2024. The results we discuss will include both GAAP and non-GAAP figures adjusted for certain items, with a reconciliation of these non-GAAP measures to the corresponding GAAP measures provided at the end of the earnings release. Our comments today and in the earnings release contain forward-looking statements and future result projections. We encourage you to review the cautionary statements regarding forward-looking information in today's earnings release and our SEC filings, which highlight various factors that could lead to actual results differing significantly from our predictions. Now, I would like to turn the call over to George.

Thanks, Bill. Good morning, everyone, and thank you for joining our call today. We have a good deal of material to cover this morning. I'm going to provide a high-level overview of the current market conditions and the strategic measures we have prioritized during this volatile time. Scott McPherson will then provide some color around our segment's performance during the third quarter, and Patrick will follow with our financial performance and guidance. The fiscal third quarter provided some challenges to our industry, mainly due to a difficult macroeconomic environment and adverse weather in January and February. We saw a decent recovery in March as the weather improved; still, it appears that the underlying consumer performance remains muted. Interestingly, April results rebounded nicely and we grew our sales and profit throughout the month. The first week of May was stronger, yet producing a record sales week for Foodservice, Convenience, and total company. At PFG, we recognize that we cannot control the external macroeconomic environment. However, we do determine how we approach our markets, customers, associates, and suppliers. We do not know the exact path the economy will take; however, we are prepared for a range of scenarios. It is worth reminding you that our company has experienced several difficult periods through our history, including the '08-'09 Great Recession and the pandemic in 2020. These experiences provide a playbook for the actions we can take in more difficult times to not only protect our business but align our operations so we emerge stronger on the other side. This is exactly what we have done in the past, and we intend to do it now. Even in our soft February, our share gains were consistent with our usual performance. At our Investor Day on May 28, you will hear our detailed strategy that looks to capture both top and bottom line growth by being a diversified food away from home distributor. We have a powerful story, and our momentum continues to build and strengthen. I'm excited for what the future holds for PFG and believe we are positioned to capture growth over the long term. Before turning it over to Scott, a few high-level comments on recent trends. As I mentioned at the beginning of my comments, the operating environment has been dynamic to say the least. When we last reported earnings, I believed we could achieve 6% organic independent case growth for fiscal 2025. Our run rate through January, along with easier year-over-year comparisons for the balance of the fiscal year, made that objective a reasonable target for our organization. However, the challenges we faced in February made this target harder to reach. At the same time, as I mentioned earlier, we did see a rebound as we entered the fiscal fourth quarter with our organic independent restaurant case growth hitting 6% in April. Despite the market challenges, our broad-based structure provides stability to our bottom line results. During these market challenges, we believe gauging the health of the consumer is difficult at this time. However, I have the utmost confidence in our company's ability to execute at a high level, capture market share, and deliver revenue and profit results that drive shareholder value. With that, I'll turn it over to Scott McPherson for more details on our segment results in the quarter. Scott?

Thank you, George, and good morning, everyone. As George mentioned, it's been a dynamic year from a trend perspective. We had a strong start to fiscal Q1, and we're progressing well through November. However, in December and through much of the third quarter, we faced disruption, including calendar shifts, adverse weather conditions in both the current year and last year period comparison, and of course, a dynamic macroeconomic and consumer backdrop. February posed challenges for our industry as we experienced significant weather disruptions and a consumer reacting to economic uncertainty. We've seen steady improvement through March, and in April, we finished the month with solid top and bottom line results. While April's outcome is certainly encouraging and shows signs that consumer trends are improving, we remain hyper-focused on what we can control. As George said, we have a broad and diverse business that has proven resilient in challenging operating environments. For us, we remain laser-focused on our strategic priorities, starting with driving growth through our sales associates across all operating segments, continuing to leverage our proprietary brands and procurement synergies to expand gross margins, and leveraging technology to drive efficiency throughout our supply chain. Now let's take a deeper look into our three operating segments, starting with our Foodservice business. Overall, foodservice growth was strong, benefiting from the addition of Cheney Brothers and Jose Santiago in the period. As George mentioned, organic independent case growth took a step back in February, growing 3.4% over the full third quarter. These results reflect steady market share gains, with independent customer account growth increasing 3.9% year-over-year and lines growing at 4.3% as we continue to broaden our offerings to customers. Performance Brands sold to independent restaurants were 53% in the quarter, continuing our strong momentum in creating value for our customers with our company-owned brand portfolio. As we emphasized last quarter, these metrics show that while we cannot control the industry backdrop, we can arm our organization with the products and resources to provide our customer base with a differentiated value proposition. Shifting to our chain restaurant business, we grew cases by 1.5% in the quarter, an excellent result given the current backdrop. The growth for our chain business was boosted by the onboarding of new business, which has been ongoing since the second quarter and continued into the fourth quarter. We expect these new business wins to boost fourth quarter results, providing incremental case growth and a favorable profit profile versus our legacy chain business. Sales and margins were helped by pricing inflation in the quarter. Current inflation rates in Foodservice remain in a range that we consider very manageable. We are closely watching the broad commodities market and preparing for any increases driven by recent tariff considerations. We have not experienced any disruption from tariff actions to date. We continue to assess our exposure, which is currently not seen as material. However, we're working closely with our suppliers and customers on contingency plans in the event inflation moves meaningfully higher. One inflation strategy we are focused on is positioning our high-quality company-owned brands as the best value proposition for our customers. Again, our sales force continues to win new accounts and gain share despite the difficult operating environment. We have steadily increased our sales force headcount through the year, attracting talent from across the Foodservice landscape. Fiscal year-to-date, our Foodservice sales force headcount increased by 250 associates or 8% year-over-year. This is roughly the pace of hiring we anticipate for the balance of the year, assuming we continue to see positive signs from the consumer. From a profit perspective, the Foodservice segment continues to experience positive margin momentum driven by favorable mix shift, profitable chain business growth, and procurement synergies. These factors, in addition to the contributions of Cheney Brothers and Jose Santiago, drove 29% segment adjusted EBITDA growth in the quarter, translating to 25 basis points of margin expansion. Turning to our Convenience segment, the narrative for the Convenience industry has remained consistent throughout the fiscal year. Despite a challenging volume backdrop, Core-Mark continues to win new business, take market share, and expand within existing customers through new offerings, particularly in Foodservice. In the third quarter, the Convenience segment's volume grew by approximately 1%, well above the industry performance. Through the full fiscal year, the Convenience industry's key categories, including snacks, candy, and health and beauty, have declined at a mid-single-digit rate, while most other key categories are down low-single digits. Over the same timeframe, Core-Mark has grown each of these areas by low-single digits except candy, which is flat. More recently, we remain cautiously optimistic about sales performance in April, which was notably better than recent periods. While too early to call it a trend, it is certainly a positive indicator. We are very excited about our pipeline of new business in Convenience. We have found that our proposition as a consolidated Convenience and Foodservice distributor provides a competitive advantage and has been one of the key reasons that we continue to add new accounts at a fast pace. We will expand more on this topic at our Investor Day. Finishing up our segment commentary with Specialty, formerly known as our Vistar segment, total net sales for Specialty were roughly flat in the third quarter on a low-single-digit volume decline in the period. As expected, the third quarter was difficult for both theater and value channels due to the lack of content and competitive activity in the theater, along with consumer challenges for the value segment. On the positive side, we have seen stabilization in our vending and office coffee business, benefiting from the return to the office trend. Our small parcel business has improved as we build upon our small but rapidly growing e-commerce business. Something you'll hear more about at our Investor Day. In conclusion, total PFG operating companies weathered a difficult backdrop. From a competitive positioning standpoint, we grew share across all three segments. We have continued to make progress in our mix and margins and are performing well operationally. We feel good about our positioning to drive growth and deliver on our customer value proposition. I'll now turn the call over to Patrick, who will review our financial performance and outlook. Patrick?

Thank you, Scott. This morning, I will review our financial results from our third quarter, provide some color on our financial position, and I'll review our guidance for the balance of the year. Before jumping into our results for the quarter, we have two housekeeping items to address. First, as noted in our press release, our Vistar segment has been renamed as Specialty to align our naming conventions across the three operating segments. We did not add or remove any operations from this segment in our financial reporting; it is simply a name change. As we always do, we will continue to assess our segment reporting structure to align with how we operate the business. On that front, also noted in our earnings press release during the fiscal third quarter, we moved a few small items from corporate and all other into the Foodservice segment. These changes are immaterial to our results and are reflected in both the current and year-ago periods for comparability. As you've already heard from George and Scott, it's a dynamic time for our industry in the broad economic landscape. For this reason, we believe it is as important as ever to maintain a strong financial position. We believe that our balance sheet and cash flow not only insulate us from external shocks but also allow us to take advantage of market dislocations. As George described, supporting our associates, customers, and vendors through difficult times has allowed us to build upon the strong foundation of our business position. This was only possible because we had the financial resources to invest behind our organization. In the first three quarters of our fiscal year, we have used our balance sheet and cash flow to finance growth initiatives, including two attractive acquisitions, Cheney Brothers and Jose Santiago, and over $300 million in capital projects. We believe that these initiatives put us in a strong position to thrive in a range of operating environments. Let's review our third quarter business results. PFG total net sales grew 10.5% in the quarter due to the addition of Jose Santiago and Cheney Brothers, as well as volume growth and net price realization. Our total independent restaurant cases grew 20% in the quarter or 3.4% on an organic basis. Organic independent case growth was lower than we had hoped during the quarter; however, as Scott detailed, the underlying metrics, including market share, new account growth, and lines per account reflect strong execution. While it is still early, our April results improved noticeably. Total company cost inflation was about 4.9% for the third quarter, an uptick from our prior period but steady year-to-date. Foodservice product cost inflation was 3.7% in the quarter, while Specialty cost inflation was 2.8% year-over-year, and Convenience increased 6.7%. We are closely watching input cost inflation, particularly with the implementation of tariffs, and have not yet seen an impact from tariffs. Importantly, we source the majority of our inventory from domestic suppliers. At the same time, we believe we are well positioned in the event of an acceleration in inflation and are maintaining close communication with customers and suppliers. We have a proven track record of managing inflation and expect to navigate the current market using the similar playbook. Total company gross profit increased 16.2% in the fiscal third quarter, representing a gross profit per case increase of $0.39 in the quarter as compared to the prior year's period. Strong operating expense control and productivity efforts produced adjusted EBITDA growth for the Foodservice, Specialty, and Convenience segments. In particular, our Specialty segment, despite a difficult top line environment, produced 6.9% adjusted EBITDA growth. In the third quarter of 2025, PFG reported net income of $58.3 million. Adjusted EBITDA increased 20.1% to $385.1 million. Diluted earnings per share in the fiscal third quarter was $0.37, while adjusted diluted earnings per share was $0.79. Our effective tax rate was 25.8% in the third quarter. We anticipate a higher tax rate in the fourth quarter closer to our historical range. Turning to our financial position and cash flow performance. In the first nine months of fiscal 2025, PFG generated $827.1 million of operating cash flow. After $332.7 million of capital expenditures, PFG delivered free cash flow of about $494 million. Diligent working capital management and our operating results contributed to the strong cash flow result through the fiscal year. As we described last quarter, our capital spending levels for our legacy business have remained fairly steady over the first three quarters of the fiscal year at a run rate of approximately $100 million per quarter. The increase we experienced in the third quarter was largely related to the addition of capital expense to support Cheney and Jose Santiago businesses as expected. We anticipate an increase in our capital expenditures in the fourth quarter, which is typical for our company. While we remain committed to capital investment in capacity and fleet to support our growth, we are closely following the external landscape and will take appropriate steps to adjust our spending if necessary. At this time, however, we feel good about the level of investment we are undertaking. During the third quarter, we began to pay down debt through reduction in the outstanding balance of our ABL facility, in line with our stated near-term objective of reducing debt. During the quarter, we also repurchased about 138,000 shares of our stock at an average cost of $76.82 per share for a total of $10.6 million. While we are prioritizing debt reduction, we also take various marketplace conditions into account when determining our capital allocation strategy. This means that we have and expect to continue to opportunistically repurchase our shares in market downturns. This is supported by our financial position and cash flow. The M&A pipeline is robust, and we continue to evaluate strategic M&A. As always, we will apply our high standards and due diligence process in the evaluation of these acquisition opportunities. Turning to our guidance for fiscal 2025. Today, we are narrowing our sales and adjusted EBITDA guidance, primarily flowing through the results from the third quarter. We now expect net sales to be in a $63 billion to $63.5 billion range, adjusting the top end of the range by $500 million and leaving the bottom end unchanged. Our adjusted EBITDA guidance for the fiscal year is now a range of $1.725 billion to $1.75 billion, narrowing the upper end by $50 million. As we enter the final months of the fiscal year, we feel confident in these targets, and each of these ranges suggest full year 2025 results in line or above the three-year plan we set at our Investor Day in 2022. In a few weeks, we will provide more color around our successful execution of the long-term plan and discuss our vision for the next three years. To summarize, PFG successfully navigated a difficult environment in the third quarter and is prepared to maintain strong growth in a range of economic scenarios. Our financial position is strong, and we have a balanced capital allocation plan to generate long-term shareholder returns. We're excited about what the future holds and our investing capital to sustain our growth. Thank you for your time today. We appreciate your interest in Performance Food Group. And with that, George, Scott, and I would be happy to take your questions.

Thank you. Your first question comes from the line of Mark Carden with UBS. Your line is open.

Hi. This is Matthew Roth on for Mark Carden. Thanks for taking our question. Glad to hear that trends are improving a little bit of late, although it sounds like maybe still a little weak in the independent channel. Just curious if you could help us understand a little bit more about what you're seeing with consumer demand and behavior. Are you seeing any trade down or trade out? Any shifts in cuisine types from consumers? Any additional color would be great.

This is Scott. First, regarding independent demand and our independent case volume. During the quarter, we started strong with mid-single digits in January. February was a significant challenge for everyone, but in March, we returned to that mid-single digit range. As George noted, we reached up to 6% in April, which is encouraging. In terms of trade downs, we didn’t observe any noticeable changes; same-store restaurant performance was relatively flat. We did well with penetration and growing accounts, which essentially drove our independent volume. Additionally, our Mexican segment performed strongly, as did our Convenience segment from a Foodservice perspective.

And I know we've been repeating ourselves, but I think it's important to stress February was the month that really changed our quarter. But when we track our business, we track it closely by what our new business is, and our lost business and our penetration. And virtually all of the difference in February was penetration. It wasn't just in our independent; it was in the chain business and also in convenience. It just showed that people weren't out there. We didn't see it in our Specialty business or our Vistar business. And a lot of that is kind of logical. People are at work when these weather issues happened if they were able to get to work; they didn't go out to lunch. They hit the micro market, they hit the vending, and it was actually a positive for that part of our business. But it was all about February.

Great. And then as a follow-up question, just curious to get your outlook on food inflation as we go through the year here. Sounds like it may be a little early for any tariff-related inflation, but would you see any opportunities for pre-buys if you do start to see inflation, particularly with your Specialty and Convenience segments?

Yeah. Matthew, this is Patrick. I'll start with that, and maybe Scott wants to add a little more detail. But when it comes to how we're looking at inflation, again, as we reported, very much in line for Q3, very similar to what we saw in Q2, with a little bit of an uptick in Foodservice, but Vistar and Convenience especially staying pretty close to where they've been. And as we look into Q4, we'll expect – we are at least modeling that, that will be very similar, that Foodservice will be in that mid-single digits and Vistar will be very similar to what they were in Q3 and Convenience also around 7%. It's too early to really understand what's going on in tariffs, to be honest with you. And as far as the opportunity to pre-buy, we'll just have to look at that; that's really going to be as more information becomes available.

Yeah. The only tag on to that I would have is when we think about tariffs, I would say that, first off, our biggest concern with tariffs is just the macro environment and consumer share of wallet. And if automotive or some of those industries have big impacts, how does that affect the food-away-from-home space? When it comes to cost of goods, our actual cost of goods, there's a very minor impact. We import less than 10% of our goods, and especially with Mexico and Canada with USMCA, it sounds like there's not going to be much of a tariff impact there. And that really minimizes what we think the impact will be to us domestically.

Great. Thank you.

Thank you. And your next question comes from the line of Edward Kelly with Wells Fargo. Please go ahead. Your line is open.

Yeah. Hi. Good morning. Thanks for all the color. I wanted to follow up on organic independent case growth trends. I mean it sounds like a pretty robust recovery in April, especially off probably what was a pretty rough February. And maybe even a better end of April, sort of like early May. Just curious, George, to the extent that you think that's a good run rate for the business currently, are there things that we need to consider around comparisons there? And then, given that the Q4 guidance at the midpoint did come down by $10 million, I guess, despite the strong start. So is that just incremental conservatism on your part, or is there anything else to consider there?

Well, we're going to be real cautious around the macro environment. What we are seeing now is real positive. There have been some calendar differences. These are two really good weeks for us all the time, the week before Cinco de Mayo and Mother's Day week; this week so far, we are having a really strong week. Last week, it was our first week that we had ever done exceeding $1.3 billion in sales. And like I said, this week is better. I don't know that we can take a victory lap around it yet. We'll just have to see what comes up in the month of June. And I look at what is a good run rate. If you go back and look at this quarter, we just ended our fiscal third quarter, if the market was down about 3%, which seems to be what people think, we would have been well above our 6% target, I guess. I don't think that the market is necessarily any stronger today than it was just a matter of a few weeks ago because we don't see it in our national accounts. We've seen a nice uptick in our independent, but the national account looks a lot like April. The other thing I would like to mention as far as total case performance, we are very large in the casual dining area. We have one that's doing exceptionally well right now. We have another one that's doing okay. But for the most part, they are really struggling, and we've been able to overcome that with other business and obviously, with some growth from independent. So from a top line standpoint, we feel real good going into next fiscal year. And then in our Convenience business, which I'll have Scott comment, but we have had some real good wins there; we are expecting to see much greater growth next fiscal year than we're seeing this fiscal year. Now I'll turn it over to Scott for a minute.

I want to elaborate on the Convenience aspect that George mentioned. As I noted earlier, the overall market has been challenging, with many center store categories experiencing mid-single digit declines, while our Convenience segment has consistently outperformed that trend each quarter. We've discussed the pipeline opportunities in the selling cycle and acknowledge that Convenience is progressing a bit slower, but we are optimistic about our positioning. Recently, we secured three or four significant wins that will continue to unfold over the remainder of the calendar year. As George pointed out, Convenience is well positioned for growth, and we expect to see further expansion next year. Operationally, they have excelled, and their margins have also improved.

Then maybe just a follow-up as it pertains to the middle part of the P&L. Gross profit dollar growth despite weaker case volumes was, I think, better than most for modeling. I mean, I don't know about you guys. And it seems like SG&A was maybe a little bit higher, but just curious how SG&A played out relative to your expectations? Was there anything within that that came in unexpectedly higher? And is there anything there that maybe translates into Q4?

February was a challenging month for sales as well as expenses. We shipped a lot of products that were later returned, which affects both payroll and shrink. It’s tough to experience a period like this, but it’s in the past now. Additionally, we have 8% more salespeople. We are approaching this the way we always have, and despite a slow market, pulling back would hurt us in the long run. Currently, we have an 8% growth in personnel while our case growth is at 3.4%. This dynamic will incur some costs, but we are prepared to invest in our future and believe it’s the right choice.

Makes sense. Thank you.

Thank you. And your next question comes from the line of Alex Slagle with Jefferies. Please go ahead. Your line is open.

Thanks. Good morning. I think you talked about Convenience trends in April, and underlying trends may be improving. And maybe you could clarify that and whether that had to do with fuel costs moderating, if that's starting to be any kind of tailwind? I know it's been challenging. And then on Convenience, I know the Q4 lap is really tough. Maybe some color on how we should think about that dynamic as we go through modeling and trying to see whether that can grow year-over-year.

Yeah. I wouldn't say, Alex, that we've seen any improvement in the industry itself. We just have a little better penetration, and we've got some nice new business coming on. So that's what gives us the confidence. We are certainly hopeful that the industry itself is going to improve, but that's not something that we've seen at this point.

Yeah. And Alex, I'll just add on the Q4 Convenience, thanks for pointing that out. I think if they didn't have that lap from last year, seeing close to double-digit or double-digit EBITDA growth in the fourth quarter. So we're still very happy with the trends that Convenience has been able to deliver on the bottom line, and that will continue into the fourth quarter except for that comp that you brought up.

Okay. And then with the restaurants, were there any changes between underlying volume dynamics in the chains versus independents worth calling out? I think you touched on it; I didn't catch that.

We're noticing that the independent restaurants are performing better in the last few weeks. It's unclear if this is indicative of the industry overall or our customer base specifically. Unfortunately, we haven't observed much improvement in casual dining. However, our QSR business has been performing quite well. Any additional comments, Scott? I believe that summarizes the situation.

I think that covers.

Okay. Thanks for that.

Thank you. And your next question comes from the line of John Heinbockel with Guggenheim. Please go ahead. Your line is open.

Hey, guys. I wanted to start with cases per account or cases per line rather. So if lines were up 4% or so, and I think you said comp locations flat. So is that right? The cases per line down 4%, drop size kind of flattish? And are we seeing an inflection in drop size? Because I think you were down, but now it looks like April and go forward, you might actually be up.

Another one of those. Yes. Another one of those, John, that it's February. In the month of February, we didn't see that much of a decline in lines, but we saw a big decline in cases per order.

Okay. But I mean, point being, have we seen now sort of an inflection in drop size? Because if drop size can now increase, right? Because lines per account are up, whatever, three or four cases per line are flat or down slightly. Are we now seeing an inflection there in drop size?

Yeah, John. As you pointed out, clearly, our lines are up per account, but our drop sizes remain relatively flat. So when you think about our growth, almost 100% of our independent growth is driven by new accounts and driven by lines per order. I mean, that's really what's getting us there. It's really the new account growth. So the stops aren't getting bigger right now.

And one last thing for Scott, when you consider the opportunity in the Convenience sector, I'm curious about what percentage of your customer base has now adopted most of your prepared food programs, such as pizza and chicken. Also, do you believe you are achieving a mid- to high-single-digit increase among those accounts that do adopt these prepared food programs?

Yeah, John. The way I'd answer that is, I'd say we're still in the second or third inning as far as Foodservice goes. The number of concepts that we place is growing significantly. Every month, every quarter, we add a lot of turnkey concepts into Convenience. But when you think about the 50,000 stores that we have, we've got a long runway ahead of us. I think we're getting better at it. Our Convenience segment is doing really well there. And to your point, in Foodservice, whether it be coming out of Convenience or whether it be coming from PFS into Convenience, we're growing in that mid-single to low double-digit range on a pretty consistent basis.

Thank you.

Thank you. And your next question comes from the line of Kelly Bania with BMO Capital. Please go ahead. Your line is open.

Hi, good morning. Thank you for taking our questions. George, I was curious about how smaller and other competitors are responding to the current environment. February was quite challenging, and it seems like volatility might continue. Are you noticing any changes in how others are managing costs and service levels? Is this creating opportunities for you to gain market share?

Well, I would say that the market is more competitive than it has been really in quite a while, probably going back to the Great Recession. And I think that's normal when you have volume harder to get. I think things are going to get more competitive. As far as smaller competitors, if you consider the information that is made as far as how the restaurant part of the industry is doing versus what we see on our Circana report, I think it shows that the large distributors are continuing to gain a bigger market share than the smaller ones.

And I guess on that note, just on competition, are you seeing any change in competition for the sales force in terms of the talent you're able to hire, the cost of hiring that talent? Any color on that front?

We're not seeing any change there at all. We have a strong pipeline of experienced salespeople available, which is part of the reason we are continuing to expand our sales force at the rate we are.

That's very helpful. And last one for me. I know you have the Analyst Day coming up in a couple of weeks here, but lots of questions on what that guidance could look like. And just curious, if you wanted to give us any bit of a teaser for how to think about your plans for the next several years?

Yeah, Kelly. This is Patrick. I'll just jump in here. We're very excited to see all of you at Investor Day, and we'll be really happy to share the guidance at that time.

We don't tease.

Thank you.

Thank you. And your next question comes from the line of Brian Harbour with Morgan Stanley. Please go ahead. Your line is open.

Thanks. Good morning, everyone. George, regarding your comment about competition, are you referring to price changes at the margin or how does that show up?

Well, I think that we're in an industry that's pretty rational, but we all want to grow. And I think that when growth is hard to come by, I think people get more competitive. We're certainly looking closely at our pricing, looking closely at our cost structure all the time. And then I would say that the prepaying or upfront monies are certainly something that has become more commonplace in our industry. Other than that, I really don't see changes.

Thank you. With Vistar, I guess, Specialty now, did you sort of expect it to be a bit slower quarter there? I guess, and also just as we think about kind of the future growth rate, would Q4 look similar? And have you seen kind of recovery in that business too? I know the comparison is a little bit different, but could you talk about your expectations there?

Sure. I'll take that. This is Scott. We called out last quarter in our remarks that we knew we were going to have a pressured quarter for Vistar, particularly in the theater space. Q3 is traditionally not a great theater quarter. Also, we had some pressure in the value channel as well, which we expected. As we've moved into March and into April, similar to the other segments, theaters had great content. Theater looks like Q4 is going to be really strong content as well. But beyond theater, Vistar is a very diverse business. We feel really good about the pipeline we have with our e-commerce platform. And then also with the return to work, we're starting to see some real signs there in our office coffee and our vending. So we're really optimistic about Vistar, and they had a couple of tough quarters to start the year. Obviously, had a nice EBITDA quarter this quarter, and we'll start to see some growth out of that segment. So really feel good about where they're headed.

Thanks.

Thank you. And your next question comes from the line of Jake Bartlett with Truist Securities. Please go ahead. Your line is open.

Great. Thanks for taking the question. I'm sorry to go back to some of the near-term dynamics, but I just want to make sure I understood what's happening in April. And one question is whether spring break shift along with Easter seems like that could have had a pretty big impact. So, I just want to make sure that that's not what's partially driving the better April. And also, just looking back at last year, I believe you started the quarter with a fairly solid April. And so the question is what your compares are like in the next couple of months. And then I have another question.

We're being cautious for several reasons. The timing of Easter has changed, and although April was a decent month, it was quite uneven. The week after Easter tends to be slow for us, and we faced tough comparisons toward the end of Easter. Overall, I don't think the timing shift had a significant impact; it all seemed to balance out. Additionally, we're in a different cycle now. Cinco de Mayo has traditionally been a strong week for us, and Mother's Day usually falls close to it. Last week was strong, and the start of this week was unexpectedly good, but I think many retailers waited until Monday to stock their products for Cinco de Mayo. These factors contribute to our current cautious outlook. Throughout the year, we've faced calendar challenges, such as Valentine's Day falling on a weekend, which significantly affected our sales as we missed out on potential business during that week.

Great. That's helpful. And my next question is about your margin expectations in the fourth quarter. And if I'm doing the math right, it looks like you're expecting fairly minimal EBITDA margin expansion in the fourth quarter. The question is whether that's just due to the compare, the really strong expansion you had last fourth quarter. But also, if you can talk to some of your productivity measures, how you feel like you're doing in terms of your productivity and efficiencies? And just anything we should think about in terms of what you're proactively doing to just protect your margins.

Yeah. First off, the biggest color I'd add to have on EBITDA margins in the quarter. I think we've talked a little bit about Convenience. They had a pretty sizable gain in Q4 last year. So that's one call out. When I think about margins overall, really pleased with how all three segments are operating from a margin standpoint. It really comes down to a few things. One of those is mix across all three segments. I think we've done a great job with mix and are growing independent cases. We've done a really nice job with chain margins in Foodservice as well. And that's really just as we looked at that portfolio of customers. We've got some great customers that we've onboarded. So we feel really good about how we're progressing margin-wise in Foodservice. Convenience has done well, and a lot of that is just our growth in key categories. I think about Foodservice, and some of those categories drive higher margins. And similarly, in Vistar as well, in our Specialty segment, some of the segments that are growing tend to be our higher-margin segments. The last thing I'll call out around margins is just procurement strategies. We talked a little bit about it last quarter. For the last year, we've been bringing our three segments together, having them work together on common vendors. We've now got Cheney and Jose Santiago; and obviously, we're able to look at the deals that they had negotiated as stand-alone and work through some of those opportunities. So we feel like our procurement opportunity is also a way to continue to keep our margins strong.

Thank you.

Thank you. And your next question comes from the line of Andrew Wolf with CLK. Please go ahead. Your line is open.

Thanks. Good morning. I wanted to follow up on the implied Q4 guidance. I understand the need to be conservative in this environment, but it seems to indicate a slowdown if we exclude the acquisitions, or it reflects a maintenance of the Q3 organic EBITDA growth rate. There are various explanations for this. One possibility is that it's a conservative approach. Regarding this conservatism, are you referring to the 6% organic case growth, or as you mentioned, George, is it more about being very competitive now and potentially affecting gross profit per case? If the results were to come in somewhere in the middle of your range, would that differ from what people might expect to be slightly better?

Our guidance is a reflection of how our people on the field are looking at things, and they tend to be conservative. We want them to be conservative, but the competitive nature of the industry may have something to do with that. They are the ones that are on the front line dealing with that every day. But I think we feel with our guidance, we would like to think that we'll be able to stay at least at 6% independent growth. But as I mentioned earlier, and Scott's mentioned too, we got to be cautious. We really don't, at this point, know what June is going to be, but right now, we feel good.

I was just going to add real quick. Obviously, we've taken a variety of scenarios, both economic and consumer, and backdrop as George said. So we feel we're being prudent, but like I made in my comments, we feel that this range is appropriate. And based on what we've seen to date, we feel good about the guidance that we've given.

Got it. I thought that was what you were saying; just wanted to explore it a bit more. Scott, regarding Convenience, when Core-Mark was public, many of the factors that attracted customers were focused on fresh products and consolidated delivery, which simplified operations for them. Is that still the situation, or is there now an additional element with improved capabilities in Foodservice? Could you provide some insight, knowing you'll likely elaborate more at the Investor Day, on what is contributing to the new customer acquisitions in the Convenience segment?

No, it's a great question, Andy. When I think about the evolution of Convenience stores, you're right, and I know you used to cover the space. Fresh was the calling card 10 years ago. And as fresh evolved, fresh really worked into a broader offering outside of center stores. So that's really food away from home. And I think the consumer expectation got a lot higher. It wasn't package sandwiches and burritos anymore. It became high-quality restaurant-quality food in Convenience stores. I think that's the real driver behind our message to the independent and the chain, and I think that it's gone a long way for us to pick up new accounts and gain share.

Okay. Thank you.

Thank you. And your next question comes from the line of Jeffrey Bernstein with Barclays. Please go ahead. Your line is open.

Great. Thank you very much. My first question is just on the next three-year outlook, and I recognize that's likely to come later this month. But George, just wondering conceptually, how do you get your arms around forecasting the top and bottom line in the next few years when you're battling through the current very cautious dynamic environment? Obviously, visibility is limited. You think there's a lot of opportunity for market share. But do you change your thought process in terms of how you guide for the next few years when you're in an environment like this? Or are you able to see through that and kind of see what the underlying opportunity is for the business? And then I have one follow-up.

I think the current environment always affects you, right? I mean a lot of what we do as far as our projections comes from our people in the field. And like I said a few minutes ago, they are the ones that are in the heat of the battle every day. But I will also tell you that they're very confident. I think February shook everybody; that's natural. You're trying to figure out how much of it is the consumer, how much of it is the weather, how much of it is just all of the change in rhetoric around tariffs and where we're headed. But I think we're looking at it the same way we did three years ago. We're trying to gauge another thing that's difficult to gauge is some of these smaller acquisitions that you can get that can help things. We have a nice M&A pipeline right now, not the size of what we've done in the past at this point, but we have a nice group there. And we're just putting all those things together, and in just a few weeks, right? Just a few weeks, we'll have a real good presentation for everybody.

Sure. I'll add a few more comments. As we conclude this three-year guidance, we're well within our sales targets and are surpassing the EBITDA range we provided three years ago. In a few weeks, you will hear that we remain consistent in our approach and strategies. While there will be some new elements, we believe we've executed effectively over the past three years, meeting our targets. We'll share new figures and our plans for moving forward. We're looking forward to seeing all of you in New York soon.

No, we appreciate you coming to New York. My follow-up is just on that M&A, George, that you just mentioned. Obviously, it's a difficult choppy environment for you. You would think it's way more challenged for small or midsized foodservice distribution peers. So I'm just wondering if you could talk about the opportunity. I think you mentioned a robust pipeline. And I think in your prepared remarks, you mentioned taking advantage of market dislocation. I wasn't sure if that's what you were referring to, but any thoughts in terms of how the current environment helps or hurts the opportunity for you to be more aggressive with M&A versus less? Thank you.

Well, obviously, we've got some focus on paying down debt right now, even though for us historically, the debt levels we're at today, if you take into account when we were private and when we were public, we're actually at kind of a low level of debt, and we tend to be maybe a little fearless about the amount of debt we have. But paying down debt is important to us, and we feel that we can do some fairly sizable acquisitions and not have the concern around the debt. So if you look at since the purchase of Jose Santiago and of Cheney, had we not bought Cheney, it would have been a terrible thing. But had we not, we would have pretty much paid down the debt from Jose Santiago. So we've paid down debt quickly, and we're going to continue to be very opportunistic, and we have acquisitions available to us today that we're in good shape from a negotiation standpoint. They may not be real significant, but they will help us from a growth standpoint. A couple of them will probably have in our three-year plan, but probably only a couple. That's a long answer, but that's just kind of where we sit today.

Understood. But nothing that you see of significant size; these are more good opportunities but not significant to the business?

That's correct.

Thank you.

Thank you. And your next question comes from the line of Peter Saleh with BTIG. Please go ahead. Your line is open.

Great. Thanks for taking the question. Just two questions. I guess the first one is, are you seeing any changes in independent restaurant formation given tariffs and rising construction costs? We've heard some concern about this. Just curious what you guys are seeing out in the field?

No, I think it's a little too early to tell. I mean, the tariff activity really has just started over the last couple of months. We haven't had any customers that have hit the pause button that I'm aware of. I think the independent pipeline and the independent restaurant is still very healthy and vibrant. Obviously, if we look back over the last four months with the exception of February, it's been pretty strong growth for us. Obviously, their same-store sales are a little bit pressured right now. But that's a vibrant industry, and I think you'll continue to see new restaurants pop up on a regular basis.

Great. And then just curious if you guys can comment a little bit on performance or sales performance by geography. We've heard some thoughts that some of the areas more heavily related to tourism have seen a bigger decline. Have you guys seen the same, or is it more broad-based and more confined to that February timeframe? Thanks.

Yes. I would say that the Northeast, if you take out when the bad weather times are, is surprisingly doing the best as far as increases go. Florida has been a little bit challenged with many closures there, not just hurricane-related but closures in general, restaurants that just haven't been successful. I'd say most of the rest of the country is all fairly similar, but slightly declining, but similar.

And there are no further questions at this time. I will now turn the program back to Bill Marshall for closing remarks.

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

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