Performance Food Group Co Q4 FY2025 Earnings Call

Good day, and welcome to PFG's Fiscal Year Q4 2025 Earnings Conference Call. I would now like to turn the call over to Bill Marshall, Senior Vice President, Investor Relations for PFG. Please proceed, sir.

Thank you, and good morning. We're here with George Holm, PFG's CEO; Patrick Hatcher, PFG's CFO; and Scott McPherson, PFG's COO. We issued a press release this morning regarding our 2025 fiscal fourth 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. Any reference to 2025, 2026 or specific quarters refers to our fiscal calendar unless otherwise stated. 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 at the back of the earnings release. Our remarks on this call and in the earnings release contain forward-looking statements and projections of future results. Please review the cautionary forward-looking statements section in today's earnings release and our SEC filings for various factors that could cause our actual results to differ materially from our forward-looking statements and projections. With that, I'd like to turn the call over to George.

Thanks, Bill. Good morning, everyone, and thank you for joining our call today. I'm excited to review our company's progress through fiscal 2025 and provide our current thoughts on the industry and external environment. PFG finished the fiscal year with excellent results and momentum to set us up for a strong 2026. While the food away-from-home industry is still not quite operating at a level we would like, our company has executed our strategy to take market share and win new business while improving our margins. In 2025, we grew our top line and have now exceeded the $63 billion mark. Importantly, we grew our bottom line even faster through a combination of improving business mix and diligent focus on our gross and operating margins. As we highlighted at our Investor Day in May, PFG has carved out a unique niche in the food away-from-home market. Our range of capabilities allows our associates to aggressively pursue new business anywhere that consumers purchase food away from home with little restriction on where we can grow. At the same time, there is still ample white space for us to grow into over time, which we believe provides a runway of strong top and bottom line performance for many years to come. We would not be in this position without the collaboration across our segments, Foodservice, Convenience and Specialty. At Investor Day, we described our PFG One strategy, which is focused on capturing top and bottom line opportunities across the entire PFG platform. As we closed out the fiscal year, all our business units were contributing to our performance. Through a volatile market, each business gained momentum. We're excited about PFG's potential in 2026 as we expect to propel our results to new highs. In a moment, Patrick will provide a detailed review of our financial outlook. We are often asked how we were able to outperform and win market share at such a consistent clip. The simple answer is, it starts with our 43,000 dedicated associates. We hire the best in the industry and give them the autonomy to build and grow business. In the fourth quarter, we continued to hire Foodservice sales reps at a very aggressive rate, ending the year with an 8.8% increase compared to prior year. We are not slowing down this important investment in our business. As I mentioned earlier, the industry backdrop has room to improve, and I'm confident that we will see better trends in the future. The investments we are making in our people now will enable us to significantly accelerate growth as the industry finds its footing. Our efforts are producing results. As you know, our organization targets 6% independent restaurant case growth or better. While we were not quite at that level in 2025, I am proud of what we're able to achieve. For the full year, we grew organic independent cases by 4.6% despite facing several difficult periods. If we exclude just the February result, which was heavily impacted by severe weather, our independent case growth would have been 5%. In the fourth quarter, our independent cases were up 5.9% organically with consistent results in each of the final 3 months of the fiscal year. This is encouraging as we enter 2026, and we believe we'll be right around the 6% growth level for the full year. We have also seen success growing our chain business profitably. Over the past several years, we have shifted our portfolio of chain restaurant towards high-performing customers who are growing. We are excited to have partnered with several new accounts through the year, generating 2.2% case growth over the full year and 4.5% case growth in the fourth quarter. We still have a robust pipeline of potential new accounts that the team is working diligently to secure, which will provide additional growth. Overall, our Foodservice segment had an outstanding 2025, and we believe is poised to produce an even better 2026, despite several casual chains experiencing sales declines. We also closed the year strong in our Convenience and Specialty segments. Both organizations executed their strategic plans and saw sequential improvement into the end of the year. In Convenience, the total industry continues to see mid-single-digit sales declines across many of the key categories. By adding new accounts, broadening our Foodservice offerings and partnering with strong customers, Convenience produced positive case growth in each of the 4 quarters with a stronger performance in the second half of the fiscal year. It's hard to overstate what an accomplishment this is in the current environment. A strong focus on procurement opportunities and cost management generated double-digit profit growth for the Convenience segment over the full year. Even with a very difficult fourth quarter comparison, Convenience grew adjusted EBITDA and is entering 2026 with a great deal of momentum. Our Specialty business faced historically high prices across the candy and snack industry, a high competition in the theater channel and financial struggles for several customers in 2025. The organization rose to the occasion by securing new business, identifying efficiency gains and fostering collaboration across our broader organization. These concerted efforts led to continuous improvement throughout the fiscal year. As we enter fiscal 2026, our financial position is strong, and we are continuing to execute our balanced capital allocation plan, bringing our balance sheet back within our target range over the next several quarters. We'll also continue to look at disciplined M&A where we have a track record of delivering sustainable growth across our 3 business segments. Before I turn the call over to Scott, I want to take a moment to address US Foods statements from last week. PFG's Board has a track record of regularly evaluating a range of potential paths to generate shareholder value. We are committed to taking actions that are in the best interest of PFG shareholders, and we will continue to focus on ways to deliver further growth and value creation. The outreach from US Foods was a request for information sharing to explore regulatory considerations and potential synergies related to a possible business combination. We have a clear strategy in place to effectively build upon the company's position as a leading North American food and foodservice distributor in the food away-from-home market. We are executing at a high level continuing to make progress on our 3-year plan and advancing toward the targets we outlined at Investor Day in May. We're doing this by aggressively pursuing new business and capitalizing on additional opportunities in the market while continuing to invest in our people. We expect to be well positioned to accelerate growth. PFG is building a formidable organization that is set up to grow and win for many years to come. Because of the successful execution of our strategy and our confidence in the path forward, any transaction would need to clear a high bar on all fronts, value and speed and certainty to completion taking into consideration associated risks, including regulatory, synergy and integration risks. After careful consideration, the PFG Board determined that there was no basis to engage in the information sharing requested by US Foods. We have demonstrated PFG's powerful value proposition across our 3 business segments, have strong momentum underway and have conviction in the value-creating potential of our strategy. That is all we have to share today on this subject. And when we get to Q&A, we'd ask that you keep questions focused on our results and outlook. I'd like to conclude my remarks by highlighting how proud I am of our team's efforts throughout the year and how excited I am about what lies ahead in 2026 and beyond. With that, I'll turn it over to Scott.

Thank you, George, and good morning, everyone. I'm excited to take you through our recent performance and discuss how we plan to continue our success in 2026. As George mentioned, we had a strong finish to 2025 picking up momentum into the summer months and maintaining strong growth in the early days of fiscal 2026. Despite an imperfect backdrop, our team is executing at a high level, which is reflected in our results and outlook. We plan on building upon this momentum in the months ahead. Let's walk through a number of areas where we've had success due to the strategic actions we've taken. Starting with our Foodservice business, as George described, we were able to accelerate our performance in the quarter through a combination of strong execution and broader market improvement. Restaurant foot traffic has improved month by month. And while it declined year-over-year during the quarter, our Foodservice organization was able to offset this headwind with new accounts and increased penetration into existing accounts driving our nearly 6% organic independent case growth for the quarter. Our commitment to adding high-quality sales force talent is unwavering and a key component to our growth. In Q4, our total organic independent case growth accelerated 250 basis points sequentially, which was faster than the rate of industry foot traffic improvement, showing our consistent ability to take market share. There are several factors underpinning this success. In the quarter, we grew new independent accounts by 5.3%, the highest level in 2025. It is also the first time in 2025 that total organic case growth was greater than new account additions, which translates to increased penetration within existing accounts. We also saw our lines per drop increase in the quarter, which has been a consistent component of our success. Our ability to increase penetration and grow lines per drop despite industry-wide foot traffic declines is a very positive sign for our long-term growth potential. We believe that the industry will continue to recover, at which point PFG will be very well positioned to accelerate total case growth. In addition, our chain business performed extremely well in the quarter, while our independent business and its contributions to profitability often gets the headlines, our chain business continues to be a valuable contributor to our overall performance. Over the past few years, we have slowly transformed our chain business portfolio to align with our goal of faster and more profitable growth. The results of these actions are apparent in our fourth quarter as we not only saw a case in volume growth but higher margin contribution. This success was achieved by winning new chain business with strong and growing partners supported by long-term contracts that are beneficial to both PFG and our customers. We are also seeing positive signs from some of our legacy chain accounts, particularly in the casual dining space. While some casual dining chains continue to struggle, there is a subset that has seen success by creating a value proposition to attract foot traffic from consumers who are increasingly selective in their restaurant choices. We are thrilled to be partnering with several of these chains and are excited to see their growth in the months ahead. Overall, our Foodservice organization is seeing accelerating results in both independent and chain business with higher profit contribution, setting the stage for a strong 2026. Turning to our Convenience segment. While the backdrop for the total C-store industry remains consistently difficult, our organization was able to outperform and finish 2025 in a strong position. In fact, through 2025, our Convenience segment sales growth accelerated in each of the 4 quarters. Core-Mark continues to grow case volume, while facing an environment of total industry case declines. In key areas like foodservice and snacks, Core-Mark saw cases up low single digits despite low to mid-single-digit total industry category decline. This is through a combination of increased foodservice programs to existing customers and new account wins. I point you to our Investor Day presentation for more details on some of these key initiatives. Looking ahead, we are even more excited about what's in store. As we discussed briefly on our third quarter call, Core-Mark has signed agreements with several new customers, representing over 1,000 additional stores. We will be onboarding these stores through our fiscal 2026 second and third quarters. While there will be start-up costs associated with onboarding this new business, we expect a nice contribution to our sales and profit growth in the second half of fiscal 2026. Finishing up our segment commentary with Specialty. Both net sales and adjusted EBITDA growth for the Specialty segment saw a nice acceleration in the fourth quarter. Total net sales for Specialty increased 4.1% in the quarter, an excellent recovery. Notably, the vending, office coffee services, retail and value channels all experienced an upswing in sales performance during the quarter. Our e-commerce platform, while still small, also continues to grow at a double-digit clip. We have very high expectations for this area of the business over the long term. Overall, we are very optimistic about the future of Specialty despite some of the persistent growth hurdles and believe 2026 will build on this momentum. In summary, all 3 of PFG's operating segments accelerated their growth in the final quarter of the year and are well positioned entering 2026. I'll now turn it over to Patrick, who will review our financial performance and outlook.

Thank you, Scott, and good morning, everyone. This morning, I will review our financial results for our fourth quarter and full year, provide color on our financial position and review the guidance we announced for 2026. We are pleased with our 2025 performance, ending the period in a strong financial position with momentum into 2026. In fiscal 2025, we achieved net sales above the midpoint of the long-term target range we announced in 2022 with adjusted EBITDA above the high end of the target range. The financial priorities we outlined at our Investor Day in May support our operating strategy and new 3-year sales and adjusted EBITDA targets. We are focused on translating our profit into strong and stable cash flow, which we then look to deploy in value-creating investments and cash return to shareholders. We believe that these initiatives have put us on a path to deliver strong returns over the next 3 years. Some financial highlights from the quarter and year. PFG's total net sales grew 11.5% in the fourth quarter as strong underlying trends in all 3 of our operating segments were boosted by the addition of José Santiago and Cheney Brothers. As a reminder, we will begin lapping the José Santiago acquisition in the first quarter of 2026. We have one more quarter of incremental acquisition contribution from Cheney Brothers and we'll begin lapping these results in the second week of the second quarter. Total company cost inflation was about 4.3% for the fourth quarter, a slight sequential slowdown from the third quarter. The main driver of the lower inflation was in the foodservice area, which experienced product cost inflation of 2.5% in the quarter, more than 1 point lower than the third quarter. The deceleration in foodservice inflation was largely the result of lower year-over-year increases in poultry and dairy, somewhat offset by cost increases in other proteins, including beef and seafood. Specialty segment cost inflation was up 3.3% year-over-year and Convenience costs increased 6.5%. We are closely watching product cost inflation. At this time, we are continuing to model low single to mid-single-digit inflation in 2026. As a reminder, we source the majority of our inventory from domestic suppliers and therefore do not expect a material impact from tariff increases. Still, we are remaining vigilant and in close communication with suppliers and customers to be able to adjust, if necessary, as the situation evolves. We have historically been able to manage price swings, including both inflation and deflation and expect to use a similar playbook going forward. Moving down the P&L. Total company gross profit increased 14.6% in the fourth quarter, representing a gross profit per case increase of $0.17 as compared to the prior year's period. In the fourth quarter of 2025, PFG reported net income of $131.5 million, adjusted EBITDA increased 19.9% to $546.9 million topping our previously stated guidance range. All 3 operating segments contributed to our strong adjusted EBITDA performance, in particular, Specialty saw a nice rebound to 9% segment adjusted EBITDA growth in the period. We are also particularly pleased with the Convenience segment profit performance, which saw adjusted EBITDA growth of 4.8% in the quarter. This result was despite a difficult year-over-year comparison due to both a strong underlying performance and a large accrual true-up in the prior year period. Over the full year, the Convenience segment increased adjusted EBITDA margins by 20 basis points. Diluted earnings per share in the fiscal fourth quarter was $0.84, while adjusted diluted earnings per share was $1.55 representing a 6.9% increase year-over-year. Our effective tax rate was 25.6% in the fourth quarter. Our quarterly tax rate benefited from an increase in stock-based compensation and income tax credits. At this time, we expect our 2026 tax rate to be closer to our historical range. Turning to our financial position and cash flow performance. In fiscal 2025, PFG generated $1.2 billion of operating cash flow. We invested $506 million on capital expenditures during 2025, resulting in free cash flow of about $704 million. As we described last quarter, our capital expenditure level has increased due to investments to support capacity expansion at Cheney Brothers. We are currently expecting a full year CapEx number in fiscal 2026 in line with our long-term outlook of 70 basis points on total net sales as we continue to invest in growth projects, including warehouse expansions and increasing our fleet. These are high-return projects that will support our long-term growth goals. During the fourth quarter, we also repurchased about 177,000 shares of our stock at an average cost of $75.39 per share for a total of $13.4 million. While share repurchases are a key component of our capital allocation strategy, we are currently prioritizing debt reduction. As you heard us discuss, our capital allocation strategy focuses on 4 key levers: capital expenditures, leverage reduction, share repurchases and M&A. Most of our capital spend is directed towards infrastructure to support our growth through warehouse capacity expansion and increased fleet. At the same time, our strong balance sheet enables us to explore new investment opportunities. We will continue to take various marketplace conditions into account when determining our capital deployment. As George said earlier, we will maintain our balanced capital allocation strategy to best position the company to capitalize on opportunities in the market and drive shareholder value. The M&A pipeline remains robust and we continue to evaluate strategic M&A. PFG has a history of successful acquisitions to drive growth and shareholder value, and we expect that to continue. At the same time, we will apply our typical high standards and robust due diligence to evaluate high-quality acquisition opportunities. Turning to our guidance. Today, we announced guidance for the first quarter and full year 2026. For the first quarter, we expect net sales to be in the range of $16.6 billion to $16.9 billion and adjusted EBITDA between $465 million and $485 million. For the full fiscal year, we project net sales between $67 billion and $68 billion and adjusted EBITDA between $1.9 billion and $2 billion. As previously mentioned, the first fiscal quarter will include the incremental results from Cheney Brothers, which we will begin lapping during the second week of the second quarter in fiscal '26. These targets are aligned with our 3-year projections we announced at Investor Day with sales in the range of $73 billion to $75 billion and adjusted EBITDA between $2.3 and 2.5 billion in fiscal 2028. When building your models, keep in mind that fiscal 2027 will include a 53rd week. To summarize, PFG closed our 2025 with strong results and solid momentum into 2026. All 3 of our operating segments are performing well and contributing to our overall results. We are in a solid financial position supporting our growth investments and capital return to our shareholders. We are excited about the future and believe we are well positioned to continue to win business within the US Food away-from-home market. happy to take your questions.

Our first question comes from Mark Carden with UBS.

So to start, it sounds like the overall industry backdrop continues to slowly improve. How are you feeling about your July and August to date and as you think about your guidance for the year ahead, what kind of industry traffic backdrop are you building it on?

Well, this is George. So far, July and the first couple of weeks of August, we have seen an uptick primarily in our independent Foodservice business. I'm going to have Scott kind of comment on the other channels. I guess when you just go to our prepared remarks, I think there's a lot of confidence around here that we'll be able to achieve that 6% number this year, but we are off to a start that gives us that type of confidence.

Yes. I think the other comment I'd make there is if you look at Black Box results over the quarter, they continued to improve over the fourth quarter and we actually saw our first positive result in July. So really positive trends around traffic and restaurant. Looking at the other 2 segments, Convenience segment continues to be pressured. But what gives us a lot of confidence in Convenience is we continue to grow share and outperform there. And we talked about in the remarks a couple of really nice wins that we'll add on over the next couple of quarters that will really contribute to our growth and profitability in Convenience. And then when I think about Specialty segment, we've got a couple of channels that are still pressured. But overall, we had a really nice fourth quarter, have a lot of momentum in our e-commerce space and a couple of our other segments. The return to work really helps us across all 3 of our segments. So we feel really good about the landscape.

And Mark, this is Patrick. I want to add to the last part of your question regarding our outlook. We are certainly confident in our full-year numbers. We use a range that reflects current economic trends and our performance, and that's how we've constructed our outlook. We have strong confidence in those numbers.

That's great. And then just my follow-up, a 2-part question just on sales force. First, just with one of your larger competitors moving past some of the sales force issues from a year ago. Are you seeing any changes in the availability of quality talent? And then second, any anticipated changes in your pace of hiring over the course of the year ahead with the improving traffic backdrop?

Yes, Mark, this is Scott. Clearly, in the fourth quarter, we saw great availability of talent. Fourth quarter was actually our strongest hiring quarter of the year. And for the year, we finished in the high 8% range as far as new sales people that we've hired over the course of the year. We're a decentralized company. We allow our opcos to make those decisions. We have some that are hiring at a clip greater than 8 % or 9% and some that are a little lower than that. But when we look at that, we got 6% case growth, I feel really good about that momentum. And even with that, we have really good leverage in the Foodservice space. So we feel really good about the landscape of hiring. We've got great talent available to us and feel like we're a great place for them to land.

Yes, I'll make a couple of other comments there. I mean, on paper, it looks like we're hiring, I guess, beyond the pace that we typically do. The restaurant business has been challenged for quite a while where we get our numbers as far as market share and the best information we can get shows that in our Foodservice business, where about 82% of our business is restaurants, where the rest of the industry is about 57%. So we're really dependent on the growth of restaurants. I think when you go through as many quarters as we went through where it was challenged, you end up spending a lot of time on defense when we like to go out and aggressively pursue business. So for us to get that people count up to get our salespeople in a position where they voluntarily take some territory splits, and we got the people to let that happen has been very good for us. We'll probably down the road come down a little bit, like Scott says, it's their decisions. I would suspect that that's what will happen. But having what our average salesperson does a week and business come down has been good for us. When you look back all the way back to that COVID period, and we weren't hiring and we didn't realize the level to which our people were improving until the rebound from COVID. And then you wake up one day and the average person is doing probably more business than what you would want to have to put out consistent growth. I mean there's only so many hours in a day for them. And when we have our calls with our people, Scott ends every call, every single call encouraging our people to add salespeople. And for the most part, that's what they're doing. Some of them are in a little different position. They've already done that. But we're getting good response from our people and an 8.8% number for us today, it's a big expense to handle, but it is the right move for us to make.

And we'll go next to Kelly Bania with BMO Capital.

Just wanted to talk about the procurement savings target that you outlined at the Analyst Day? And how much progress there, does that contribute to the fiscal '26 outlook specifically?

Kelly, this is Scott. So we talked a lot about that at Investor Day. We feel really good about our progress. And just to take a step back, we are always constantly working with our vendors and working on procurement opportunities. But as we looked at the landscape, we made the acquisitions of Cheney Brothers and José Santiago, and we continue to do a much better job working together between our segments. We saw an opportunity to create win-win scenarios with our vendors, which is what we're doing today. I think as I look at the spread over our 3-year guidance, I think that spread of procurement synergy will be pretty balanced. And we're well on pace in this first year to achieve that.

Okay. That's helpful. And I just wanted to also ask a couple of questions about Convenience. Obviously, the broader restaurant traffic is really improving here, but the Convenience division remains kind of pressured. Obviously, you have some new business wins. But I was just curious, maybe, Scott, what do you think needs to happen here? It looks like maybe easier comparisons were starting to help in the industry but just when do you think that will start to turn, if at all, is that in your outlook? What do you think the operators need to do? And just any color on foodservice kind of sales and where that's tracking in that division?

Sure, Kelly. When I look at the landscape of Convenience overall, one of the things that really hurt Convenience was the work from home. And as we've seen that increase, and I see nationally numbers where people are back in the office, 3.5 days a week, a lot of people are 4 and 5, you think about that commuter traffic that morning traffic that's getting coffee and breakfast, that was a big part of where Convenience lost. And so definitely, I think the macro is improving a little bit. We've talked a little bit about the illicit vape issue in the country. And I think that this administration is looking a little more favorable on that, meaning that they're going to enforce it. That's a big upside for our Convenience segment as well. And then I think the other thing that gives me great confidence is we continue to grow share. And not just the big customer wins that we've talked about, but our street folks are out there, our independent performance is getting better. And so I think we're going to fare well even if the macro remains pretty challenged.

Yes. And Kelly, to that last point on the outlook. We really didn't plan for the macro to improve. Really what's in the outlook as far as Convenience goes is just the excellent business wins that Scott talked about earlier in his remarks. And just as you look at how they finished up Q4, they have just a lot of momentum. They're executing extremely well. So it's really more of that than, say, that the macro is going to improve as far as the outlook goes.

We'll go next to Lauren Silberman with Deutsche Bank.

Congrats. I wanted to just ask on the independent case growth side. The independent account growth of 5.3%, does that growth compound over time as presumably new accounts come in with smaller basket sizes and then build. Can you just talk about that dynamic as you've seen such strong new account growth and how that translates to increased penetration in future quarters?

We look real close at the average customer within our new business versus existing business. And there's not much difference. I mean, it's certainly less, but it's not much less. That's a tribute to our salespeople when they pick up an account, they get a big piece of that business right away. The other thing that's been a positive for us is that we've been growing our lines all through this tough period of time. But so far this fiscal year and really most of the last quarter, we've been seeing our sales grow as fast as our lines have grown, which before we've not seen that because they weren't buying as much of the product that we sold to them both years. So that's been a real positive for us as well. And then by further beefing up our salespeople, what we found, and this is normal, I think, in any environment, it gets really competitive, and the actual channel isn't growing, people get more aggressive. And by having the people out there and having our existing people calling on new accounts as we do some splits of the territories, what we found is we're not losing accounts at the rate we were before. I mean we feel like we've always been good with that. But when we have single-digit reductions in accounts from the previous year in an industry that's got the kind of turnover that we have, that's a good sign for us. And we've been able to get that accomplished.

Great. And then if I could just shift and ask about what you're seeing in the M&A landscape, how your pipeline looks, willingness of potential targets to make deals come to the table and anything you're considering for '26 or how we should think about that?

We feel good about what we have going on right now. We have some nice conversations, some that are actionable. Nothing that I would call in our history that I would call significant in size. But it's a great market today. I mean there's a great amount of activity.

Lauren, just going back to Investor Day, we talked a lot about our strategy and I'd say our strategy hasn't changed.

We'll go next to Edward Kelly with Wells Fargo.

Nice quarter. George, I wanted to ask you to maybe just kind of like take a step back on the industry. You've got more, I think, experience here than probably anybody. Things have gotten better. But if we look out, we have tariff pricing that's starting to come in, that's followed by a large refund cycle. I'm just kind of curious as to whether you think some of the volatility that we've seen continues. And is your confidence really just around your own ability to execute against that. But just any color on bigger picture and how you're thinking about this backdrop would be helpful.

The improvement is encouraging, but it remains negative. We received mixed results today from a few chains. Many casual dining establishments are struggling, though a couple have made significant comebacks. It shows that recovery is possible. However, I wouldn't want to depend on industry growth at this point. A lot of it revolves around pricing; our customers face increased costs that they have to pass on, which places limitations on the industry. If conditions remain stable, I am confident we will achieve at least a 6% growth rate, as indicated by our current performance. While it could potentially worsen, I don't expect this to happen. I anticipate gradual improvement, but no significant jumps, and I see similar trends in the Convenience sector. Our organization has a strong position in candy and snacks, but prices are rising substantially, and it seems likely that more states will remove certain items from the snack card. This could impact us. Overall, when considering everything together, I believe we are in the right channels, and I expect positive outcomes for us.

Great. And then I just wanted to follow up maybe for Scott, maybe for Patrick. I'm not sure. But on the Convenience side, you have some new customer wins coming in. How significant in size is that? And then you mentioned some start-up costs sort of early on. So I'm kind of curious as to how you're thinking about the cadence of EBITDA growth in Convenience as the year progresses and what's a good target in terms of EBITDA growth in that business for the year?

Yes. Ed, this is Scott. So obviously, we've called out that one of those chains will roll on starting September, the other one in December. So it kind of gives you a timing. They'll probably roll on over a handful of weeks. We're obviously, from the September one, we're hiring right now. So we're obviously investing in labor and fleet and some facility modification to prepare for all of that. So we feel like we're in a great position there. But obviously, in this probably Q2, I think our profits will be a little bit moderated just because of the investment that we're making, but I think they'll normalize into Q3 and Q4. We're not going to give a specific target on EBITDA growth for Convenience, but we feel really good about their performance in the quarter in 2025 and also into 2026. We feel really good about how they're going to perform.

We'll go next to Alex Slagle with Jefferies.

Congratulations. Regarding the EBITDA margins, which are at record levels across nearly all divisions, could you elaborate on some of the additional factors that may be contributing that we haven't discussed yet? The favorable sales mix is continuing, and you mentioned some procurement wins. Are there any short-term inventory holding gains we observed? Please touch on the other aspects of profitability as well.

Yes, I'll begin with that and perhaps Patrick will add to it. When I consider margins across the three segments, the mix stands out as the primary theme. We saw strong mixed performance in the Foodservice segment, where our 6% growth in independent cases significantly boosted margins. In the Convenience area, the focus is on the commodities we offer, particularly in foodservice, snacks, and candy, where we're experiencing solid growth in profits. This reflects a shift in commodity mix, which is also evident in the Specialty segment. Overall, the mix across all three segments is very positive. Additionally, we have seen strong operational efficiency across all segments. Each of them is performing well operationally, including in areas like warehousing, transportation, hiring, employee retention, and safety, all contributing to a favorable environment. Regarding procurement savings, as I mentioned previously, we believe this is definitely contributing, and we are optimistic about our progress in that area. Patrick, would you like to...

Yes. I'll just touch on a couple of things, Alex. One, yes, we're really pleased with the margin improvement we saw in Q4 and full year fiscal '25 and are looking forward to continuing that in '26. You brought up inventory gains. Inventory gains were a slight benefit in Q4. But as we look out over 2026 quarter-by-quarter, but we don't expect to see much in terms of inventory gains, and that's what we modeled in our guidance both for Q1 and the full fiscal year.

Okay. Great. And just a follow-up. You talked about stability in trends, which I guess you're seeing that continue. I mean that comes at the same time, it looks like a good deal of uncertainty and variability between operators and brands lately. So maybe you can kind of clarify what you're seeing in terms of the stability.

Yes. Alex, I'd say, first off, I go to Black Box and just look at traffic. We saw traffic improve sequentially over Q4. And then as I mentioned, July was really the first positive month. But to your comment, when I look at QSR segment, when I look at fast casual segment, it's a little bit the haves and the have-nots. As George mentioned, those that have created a value proposition with price to value seem to be performing really well. And then we have some other chains that are really struggling in that space. So that's kind of a blend. We've been very fortunate, as we mentioned, our chain growth was really strong. We've been very fortunate to partner with some of those more progressive restauranteurs out there, and it's really paid off for us.

Yes, I want to acknowledge our chain teams, both in our broad line and in our operational companies that focus solely on chain. We presented them with a significant challenge. Some chains have faced considerable declines, and our loyalty to them has been strong as we wait for their recovery, similar to others we've seen bounce back. We encouraged them to expand their capabilities to manage more SKUs and to attract different types of customers that are experiencing growth, and they succeeded in doing that, which was no easy task. It required a lot of courage to achieve what they did. We are currently in a favorable position. It was a positive quarter for us, and we have a solid amount of time ahead with business opportunities that do not have sales histories, which will be significant contributors for us this year.

We'll go next to Brian Harbour with Morgan Stanley.

On that topic, I think you have a good perspective. I would say that quick service has been somewhat disappointing lately. While it's improved compared to previous quarters, it seems to be the area of the industry facing more challenges. I'm curious if, on the independent side, you think full service is performing better than quick service. Is that similar to what you're seeing with chains? Do you think demographics play a role in this, or are experiences just holding up better? What conclusions can you draw when looking across your customer base?

QSR has been interesting because where we're doing well, and we're not huge in that category, but we certainly have our share. And where we're doing well, it's actually at the top of the market in the higher-priced QSRs, particularly one in the burger area that's doing great. We got a couple in chicken that are really, really doing well. But I think that what may be here to stay, there's kind of what is hot and if somebody is resonating with the consumer, everybody knows it very quick because the social media is such a big part of what happens in the chain restaurant business. And sometimes, it's just an item that will bring somebody up to a different level from where they were before. I would agree that, if you want to call it, casual dining, family dining, sit-down type restaurants of late, they appear to be coming back. Not everybody, of course. Like I said, social media is a big component here. But it seems like people are doing a little less takeout. Delivery seems to still be big, but I don't know that it's growing fast. I think people are wanting to get out again and enjoy themselves. And even with the kind of growth that we're running now in independent, we don't see that kind of growth in our takeout programs. So I think people are coming back to the restaurants a bit.

Okay. Yes. Can you comment maybe just on integration of Santiago and Cheney Brothers. Is that kind of on track? Is it perhaps ahead of schedule? Can you comment on sort of organic growth in those businesses since you've acquired them?

Well, we don't do much in the way of integration early with acquisitions because we want them to be the ones that drive what type of integration that we do. There are some obvious things that we get done early on that have to be done. But I would say with both of them that it's moving at a pace that we typically do see. I mean it's really been for us, year 3 just seems to be the year that we tend to take off. We saw that with Reinhart. We're seeing it today with Merchants. The legacy Merchants companies are just on fire right now, and it's up 3 years. Cheney and José Santiago are both extremely well-managed businesses. I think that after our purchase of Cheney, we saw that market get a lot more competitive, particularly the Florida part of that market, and that's probably normal in that type of situation. And they didn't, for a while, they've put out kind of the historical type of growth, but now they're back and they're getting that done again. So we're just so confident in those 2 companies. But I can't speak to any significant amount of integration that we've done at this point.

And we'll take our next question from John Heinbockel with Guggenheim.

George, I have a question on you're creating sales force capacity, individual salesperson capacity, which is great. How do you want them spending their time? And I know this is decentralized. And I wonder because there's such a big opportunity, right, in lines per account penetration. Are there some opcos that are doing phenomenally well and thus, there are best practices? Because it's been an opportunity that all of you have kind of struggled with. So I wonder if the sales force capacity is toward penetration. Can you guys finally move the needle on lines per item in a significant way? Or do you really want them to prioritize new accounts?

I think the additional people that we've added, I think, is helping our penetration, but I think it will help more as we move forward. Training always, we're going to a lot more online training but it is very decentralized and we do a lot of things around best practice, but that between them or maybe some coaching that comes from Scott or from Steve Broad as to who to go talk to. But they run their businesses. And I think that things move in trends within our company, and the trend has been to beef it up, to get the more experienced people calling on new accounts and get our people where they have more time to work on penetration because it is certainly the most difficult part of our business today. People are busy. A lot of ordering is done online and it's less of an opportunity to penetrate better or to pull SKUs from your competitor. This getting time freed up and getting the real experienced, talented people out there, I think that's where we're headed. And I think that would be in just about every company. I think, Scott, you would look at it that way, too.

Agree.

All right. Maybe for Scott, what does the RFP landscape look like on the Core-Mark side? Obviously, that develops over time. But is it expected to grow significantly over the next couple of years? I wouldn't anticipate losing many of those, especially new ones, not the ones you already have. How do you plan to prepare capacity for those wins? You don't have that information ahead of time, but what is your current stance on it?

Well, I can tell you, John, that our recent successes came from effectively anticipating capacity. We expanded into two new facilities well ahead of securing those customer wins, and had we not done that, we might have had to turn away that business. We continuously assess our capacity across the network to identify where new business opportunities may arise, informed by our relationships with customers and where we believe we can achieve the most progress. In the Convenience landscape, having established relationships is quite significant, which is why we're proud to have secured a select group of prominent retailers as their primary supplier nationwide. Overall, I feel very good about the performance of the Convenience group and how they serve their customers.

And John, as you know, we've talked about this for several quarters. We continue to invest in CapEx to continue to expand buildings, get new buildings across all 3 segments. And primarily our focus, as we said, has been Foodservice. But as Scott just alluded to, we have done this in Convenience and even in Specialty as well.

I want to make a couple of comments. We're in three different businesses, and we definitely don't intend to complicate things further. While it may appear complex, those managing each business are deeply invested in them. Our priority is clearly on Foodservice, and I have great confidence in the management of Core-Mark and Vistar. When they require capital expenditures, they aren't competing for it in different areas; if they present a compelling case, we believe in their ability to utilize it effectively. Our team at Core-Mark is a prime example, as we strategically placed two new locations in anticipation of the new business opportunities. It took significant courage and commitment to make those decisions. In the past, we’ve been prudent with our spending, investing only where we were sure it would yield returns. Early on, we replaced nearly all Vistar facilities, which was our top-performing business and continues to be well-managed and highly profitable. We also invested heavily in large broadliners and saw substantial returns. Recently, we've expanded in the West, where our presence was limited, constructing new buildings and making significant additions, contributing to an 8.8% increase in our workforce as we prepare for future growth. We've seen such success with our capital expenditures that our teams feel confident, and we are committed to supporting them. I believe our capital expenditures will trend back toward a more consistent level regarding point of sales, but we will seize opportunities to exceed that if they arise. We're not going to waste money on investments for the sake of it, but I feel optimistic about our capacity growth efforts.

Our next question comes from Jeffrey Bernstein with Barclays.

My first question is just on following up on the M&A. Obviously, from a macro perspective, still somewhat difficult. I would think it's more challenged for your smaller Foodservice distribution peers. I think you mentioned you have a good M&A pipeline, but nothing of significant size, and I think that's been a consistent message. So as an alternative, George, how do you feel about your organic growth, specifically as you think about the West Coast, whether you go full speed ahead organic? Or do you prefer to wait for the M&A? It seems like it's a difficult dance to decide whether to wait versus just pursue the organic, which will presumably take a little bit more time? How do you think about balancing that? And then I had one follow-up.

Well, basically, we are betting on organic right now. And I think it's a good bet. Scott, you might want to comment on it as well. But Scott's been very involved with what we've done in the West, but we feel encouraged.

Yes. I'd say structurally, we talked a little bit at Investor Day. One of the big challenges in the West of achieving broader scale outside of capacity is just our brands. And that's one of our most powerful tools on the street and just having that critical mass in the West has been a challenge. So we have invested in a redistribution facility in the West that will allow us to take brands much more broadly to those opcos. So just another lever that we can pull as we kind of march that direction.

And probably goes without saying that doesn't mean that if we had the right opportunity from an M&A standpoint that we wouldn't take advantage of that. And you mentioned smaller ones. I mean if our people were really committed to some type of fold in, I guess I would be there, but I've never found that to be a successful route to go. You tend to not hold on to the right percentage of the business. And we like to do acquisitions where we feel we can hold on to all the business and then grow it from there. And if you're buying somebody that is a fold-in or whatever you want to call them, and their SKU base is significantly different, change SKUs, change customers is typically what happens. So we don't have a huge appetite for that, maybe no appetite at all.

Got it. And my follow-up is more specific to the first quarter. It looks like your guidance for sales and EBITDA was below at least consensus expectations. I'm wondering whether we perhaps just mismodeled or are there some unusual or noise that are impacting results on your end. I know you still have a favorable benefit from both acquisitions before they get lapped. But is there any segment expected to be below the kind of longer-term run rate or any unusual we should be aware of for the fiscal first quarter? Or perhaps, was it just a mismodeling on the Street's part?

Yes, that's a great question. I appreciate it. The quarterly cadence we provided is meant to help you understand the sales pattern in the first quarter. We have already surpassed the sales figures for José Santiago, and we will soon reach the same point for Cheney, which typically sees slower sales during the summer months. Therefore, the quarter ending in September will likely be slower for both. Specifically, for Cheney, July's sales are comparable to January's sales for the rest of Foodservice. We wanted to give you that perspective on Q1 to clarify our sales rhythm. However, we remain focused on the full year and feel very confident in our overall guidance. While we are just at the start of the year in August, we wanted to share our outlook for both the first quarter and the entire year.

I want to remind you of two positive aspects we need to consider for Q1. First, we are making significant investments in our sales team, and we ensure that our existing employees' compensation remains unaffected while they adjust to new account assignments. As the year progresses, this will gradually decrease. Second, we are incurring start-up costs as we take on a considerable amount of new business in a short timeframe. We aim to provide exceptional service from day one, which requires us to train new staff and may lead to a temporary overstaffing situation in Core-Mark. These are challenges we need to consider, but they are good problems to have.

Our next question comes from Peter Saleh with BTIG.

Great. A little over a year ago, I think you guys were talking about how the breakfast daypart was coming back, particularly, I think, on Mondays and Fridays expected to come back a little bit stronger. Can you just talk a little bit about what you're seeing? Because it seems like that daypart continues to lag, at least from what we see from the restaurant space. Just curious as to your perspective and the go-forward expectations on that daypart.

I believe that Monday lunches are mostly back, but Fridays are not. Additionally, many businesses did not resume operating seven days a week as they had before COVID. Some have realized they were not making any money on Sunday or Monday nights and questioned the need to remain open. This decision is still affecting performance, as I've noticed some have shifted from five days to six, but not many have returned to seven days, especially in non-metro large markets. Scott, do you have any comments on this?

I would agree with what you said. I think Monday and Friday continue to be pressured days. Nationally, as people return to work, the average attendance is around 3.2 to 3.5, with many opting not to come in on those days. Consequently, those days remain quite affected, particularly the morning hours, as work hours have shifted somewhat. We observe that people are arriving later, possibly enjoying their coffee and completing tasks at home before heading to the office. There is still some pressure in that regard, but it has certainly improved. I believe this improvement contributes to our growth in independent cases and has positively influenced the macro environment in Convenience and Specialty.

I look at this every day, and I think it's a barometer but you can tell by our sale of coffee in the convenience that, that morning daypart, the traffic is not back to normal, still not at 2019 levels.

Very helpful. Just a follow-up on the new account growth this quarter or maybe just this year. Was there anything specific on the type of cuisine or geographies that you're seeing?

I would say that in terms of cuisine and geography, we've performed very well in the Mexican segment, as well as in Foodservice and Convenience. We've also had some success in the Asian segment. In the Pizza and Italian areas, we are maintaining our position and continue to do well, which is a significant part of our business. Overall, we are seeing positive results across all segments.

We'll go next to Jake Bartlett with Truist Securities.

Mine was on EBITDA margin guidance. I think at the midpoint of the '26 guidance is a little bit of a less expansion than you saw in '25. And then I believe you're reiterating your 3-year targets that you expect a reacceleration or kind of a widening EBITDA margin expansion in the next 2 years. So can you just help us understand that dynamic, whether it's being driven purely by investments in the sales force near term or some of the Convenience investments to bring on those accounts. Any drivers there of the cadence of the EBITDA margin?

Yes. Jake, I'll start and see if anyone else wants to contribute. I mean if you look at it, again, we exited '25 with some really nice margin improvement. As we go into '26, we do have some investments, as we talked about. We also have some onboarding costs. And then those new accounts that we talked about might have some margin shift as well overall. But we feel really strongly that, again, it's August. We're looking at the numbers. We're very anchored to them. They're strong numbers in terms of growth. And I would expect that there's still some room for upside there, but it does have to do with some of the onboarding new customers and the mix shift.

Okay. And then to follow up on the comments on recent trends. And George, I believe you said that July, there was an uptick, but you're also talking about 6% independent organic case growth similar to the second quarter. So maybe just kind of clarify, you expected a slight deceleration from July or maybe the July uptick wasn't too material. I'm just trying to understand the cadence of what you're expecting going forward.

No, I think we're just being cautious. July and the first 2 weeks of August are a good bit better than Q4 was, okay? And the 2 weeks of August are even better than what July was. But we're cautious. It's been a volatile market. But all in all, we feel good. I'll make a couple of comments back to the EBITDA margin, too. We're bringing on 2 significant Convenience accounts and the product makeup of Convenience is totally different. And that affects us in the entirety. And if you go back to where we started without having Convenience, we were less than a 2% EBITDA, and we've reworked this business over several years. If you took out Convenience, we were at 3.5% and we still have a substantial chain business. You get outside of our chains, we don't have noncommercial business, which is, for the most part, better business, and it's not something that is our focus today or will be any time in the near future. But if you take out Convenience, but you leave all of the corporate overhead in there, we're above 3.5%. And that's huge progress for us, particularly with the kind of mix of business that we have. Our big broad liners of which we have many, they're over 5%. We don't look at it that close. But we're going to continue to put a bigger portion of our gross profit dollars to the bottom line, but we're not maniacally focused on that. A lot of that is just where our mix of business comes in effect. Now we've always grown it, but we've always had a better mix of business. Can we count on that forever? I'm not sure. It just depends on what opportunities lay out there.

This does conclude today's question-and-answer period. I will now turn the program back over to Bill Marshall for closing remarks.

Thank you for joining our call today. If you have any follow-up questions, please reach out to Investor Relations.

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