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Edited Transcript of PFGC earnings conference call or presentation 14-Aug-19 1:00pm GMT

Q4 2019 Performance Food Group Co Earnings Call

Richmond Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Performance Food Group Co earnings conference call or presentation Wednesday, August 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George L. Holm

Performance Food Group Company - President, CEO & Chairman

* James D. Hope

Performance Food Group Company - Executive VP & CFO

* Michael D. Neese

Performance Food Group Company - VP of IR

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Conference Call Participants

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* Andrew Paul Wolf

Loop Capital Markets LLC, Research Division - MD

* Christopher Mandeville

Jefferies LLC, Research Division - Equity Analyst

* Edward Joseph Kelly

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Jeffrey Andrew Bernstein

Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst

* John Edward Heinbockel

Guggenheim Securities, LLC, Research Division - Analyst

* Judah C. Frommer

Crédit Suisse AG, Research Division - Senior Analyst

* Kelly Ann Bania

BMO Capital Markets Equity Research - Director & Equity Analyst

* Robert William Summers

The Buckingham Research Group Incorporated - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the PFG Fiscal Year Q4 2019 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks by PFG's management and the question-and-answer session.

I would now like to turn the call over to Michael Neese, Vice President, Investor Relations for PFG. Please go ahead, sir.

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Michael D. Neese, Performance Food Group Company - VP of IR [2]

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Thank you, Maria, and good morning, everyone. We're here this morning with George Holm, Performance Food Group's CEO; and Jim Hope, PFG's CFO. We issued a press release regarding our 2019 fiscal fourth quarter and full year results this morning. The results discussed in 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. You can find our earnings release in the Investor Relations section of our website at pfgc.com.

Our remarks 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.

And finally, our fiscal 2020 outlook does not include the recently announced acquisition of Reinhart.

Now I'd like to turn the call over to George.

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [3]

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Thanks, Michael. Good morning, everyone, and thanks for joining our call today. I'd like to go over a few highlights from our fiscal 2019 full year results. Jim will discuss our detailed fourth quarter financial results, and I will come back and discuss the strategic rationale that supports our recent acquisition announcement of Reinhart. And then we will take your questions.

Let's turn to our results. 2019 was a successful year for PFG and I'm pleased with our team's execution. Our strong top line growth, combined with increased gross profit per case, led to profitability at the high end of our expectations for the year. Our core business segments delivered strong financial results led by Vistar's double-digit EBITDA growth. Total cases were up 6%, slightly exceeding our objective of 3% to 5% for the year. Net sales increased 12.1% to $19.7 billion, driven by Vistar, our independent case growth in Foodservice and the Eby-Brown acquisition. The increase in net sales also reflects an increase in selling price per case as a result of inflation and mix.

For the year, we experienced inflation of approximately 1.5%, especially in the center of the plate items such as poultry and meat. Inflation did increase sequentially from Q3 to Q4, which helped fuel our top line.

Let's turn to our 2 segments. Vistar had a strong year exceeding our expectations with net sales and EBITDA up double digits. We witnessed strong case sales growth in the segment's theater, vending, corrections and retail channels and as a result of recent acquisitions. The integration process is going well with Eby-Brown. We are very excited about the opportunities with this business over the next several years.

Turning to our Foodservice segment. We are pleased with our sequential improvement and we expect this trend to continue into the first quarter of this year. We're pleased with our mid-single-digit independent case growth for the year. This trend is continuing into the first quarter as well. This is against a backdrop of flat same-store sales growth for independent restaurants in the quarter. Average case prices were up low single digit as we're still in a reasonable rate of inflation. We continue to believe the overall health of independent restaurants remains solid. The macro landscape is and has been a very competitive industry. However, we have been successful in growing share and profitability for the past several years. We believe our strategic growth investments are paying off and continue to be on track to support our long-term objectives. Both of our segments are showing solid case and EBITDA growth. In fact, the Foodservice segment grew its EBITDA by double digit in the fourth quarter.

Looking ahead to fiscal 2020, we believe our core segments are positioned for another year of growth. Our 2 recently announced strategic acquisitions position us for continued future growth. We expect fiscal 2020 to be another year of solid earnings growth. Each quarter, during these calls, we like to highlight 1 associate who goes above and beyond to serve our customers and colleagues. This quarter, I'd like to shine the spotlight on 16 of our incredible associates being inducted into the 2019 class of The International Foodservice Distributors Association Truck Driver Hall of Fame. To be eligible for this honor, the driver must have at least 25 years of service with 0 chargeable accidents and may not have any moving violations in the last 5 years.

From our Performance Foodservice division, the inductees are Ronald Arnold, Dan Ashby, Ronald Burton, Ronnie Cheney, Scott Edwards, David Elliott, Robert Hagerman, Gene Harman, Richard Holloway, Billy Martin, Bradford Nooney and Robert White.

From Vistar, we have Joe Frias.

And from our recently acquired Eby-Brown team, the inductees are Danial Curtis, Terry Osborne and Wesley Raber.

These associates hail from 10 different states and deliver to customers across the country from California to Maine. We're incredibly thankful for the careers these professional drivers have dedicated to our organization and their local teams.

I will now turn the call over to Jim, who will discuss our fourth quarter financial results.

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James D. Hope, Performance Food Group Company - Executive VP & CFO [4]

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Thank you, George. Good morning, everyone. I'm pleased our fourth quarter results came in higher than we expected. Total case volume increased 9.2% for the fourth quarter with underlying organic growth of 2.9%. Total case volume included a 4.9% increase in independent cases. Growth in Performance Brand cases and broad-based growth across Vistar's sales channels, including Eby-Brown. Net sales for the fourth quarter grew 28.4% to $5.9 billion versus the prior year period.

The acquisition of Eby-Brown contributed $949.7 million to net sales, including $149.7 million related to tobacco excise taxes. Excluding Eby-Brown, net sales increased 7.7%. The increase in net sales was primarily attributable to growth in Vistar, most notably in the vending, office coffee service and corrections channel. We also experienced solid case growth in Foodservice, specifically in the independent restaurant channel. The increase in net sales was also attributable to an increase in selling price per case as a result of inflation and mix.

Overall food cost inflation was approximately 2.3% in the fourth quarter. Gross profit for the quarter grew 14.4% compared to the prior year period to $700.1 million. Gross profit per case was solid as we benefited from selling an improved mix of customer channels, including the independent channel.

The strong gross profit increase was also led by Vistar's channels. Gross profit per case was up $0.22 in the fourth quarter versus the prior year period. Gross profit margin as a percentage of net sales was 11.9% for the fourth quarter compared to 13.3% for the prior year period.

The gross margin decline was driven by Eby-Brown, who historically experiences lower margins as a result of tobacco. Gross margins would have been up slightly excluding Eby-Brown.

Operating expenses rose by 15.8% to $599.6 million in the fourth quarter. The increase in operating expenses was primarily due to the increase in case volume, personnel expense and the resulting impact on variable operational expenses. Operating expenses also increased in the quarter as a result of recent acquisitions, including Eby-Brown. Excluding Eby-Brown, OpEx would have grown approximately 8%.

Net income for the fourth quarter declined 1.9% year-over-year to $63.2 million. The decline was primarily a result of a $5.8 million increase in income tax expense. The increase in income tax expense was primarily a result of the prior year impact of the Tax Cuts and Jobs Act. The effective tax rate in the fourth quarter was 23.9% compared to 17.9% in the prior year period.

EBITDA increased 11.5% to $143.1 million in the fourth quarter compared to the prior year period. For the quarter, adjusted EBITDA rose 16% to $157 million compared to the prior year period.

Eby-Brown helped contribute to our fourth quarter adjusted EBITDA, but was not material to PFG.

Diluted EPS declined 1.6% to $0.60 in the fourth quarter of fiscal 2019 compared to the prior year period. Adjusted diluted EPS increased 32.1% to $0.70 in the fourth quarter.

And turning to cash flow, PFG generated $317.4 million in cash flow from operating activities during fiscal 2019, a decrease of $49.6 million versus the prior year. The decrease in cash flow from operating activities was largely driven by fourth quarter strategic investments in working capital to fund growth in Vistar and Eby-Brown and in the Foodservice segment. Our free cash flow came in at $178.3 million, down $48.6 million from the prior year.

For fiscal 2019, PFG invested $139.1 million in capital expenditures, in line with capital spending versus prior year. Our spending came in under what we were expecting based on the timing of certain projects. And our net debt-to-adjusted EBITDA leverage came in at 2.8x, which was consistent with last year.

Turning to our fiscal 2020 outlook. We expect adjusted EBITDA growth to be in a range of 9% to 13% over our fiscal 2019 adjusted EBITDA of $475.5 million. We believe the Eby-Brown acquisition will be slightly accretive to earnings this year. We are projecting Eby-Brown will contribute 200 to 300 basis points of adjusted EBITDA growth for the year. Fiscal 2020 organic adjusted EBITDA is projected to grow 7% to 10% and is consistent with our long-term outlook. We expect 2020 adjusted diluted EPS to grow in a range of 4% to 10% over fiscal 2019 adjusted diluted EPS of $1.85.

Higher depreciation and amortization related to Vistar acquisitions, higher interest expense due to the debt incurred to fund the Eby-Brown acquisition and higher effective tax rate versus fiscal 2019 are reflected in our adjusted EPS growth outlook this year. This outlook is based on the following annual assumptions, which includes Eby-Brown and excludes Reinhart: organic case growth in a range of 3% to 5% and case growth in a range of 6% to 8%, including Eby-Brown; interest expense in the range of approximately $70 million to $75 million; an effective tax rate on operations of approximately 26%; and capital expenditures between $180 million and $200 million, with depreciation and amortization between $175 million to $185 million. The fiscal 2020 capital expenditures estimate is higher than fiscal 2019 due to ongoing investments to drive growth, which includes Vistar's Retail East automated facility, Eby-Brown expansions and the timing of certain projects.

We recently broke ground on Vistar's Retail East automated facility in Pennsylvania. Although we're early in the process of constructing Vistar's second automated pick and pack facility, we're excited about its future prospects and potential additional volume.

In summary, our 2019 financial results were solid. We're pleased with the strong top line growth in our businesses and the sequential improvement in Foodservices' EBITDA results. We believe the strategic investments we made over the course of the last 2 years are now paying dividends. Vistar continues to be a solid source of growth, and we expect them to have another year of outstanding top line and EBITDA growth.

And with that, I'm going to turn the call back to George.

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [5]

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Thanks, Jim. Before we take your questions, I would like to share with you why we are excited about our acquisition announcement of Reinhart. After meeting with investors and analysts in New York to discuss the strategic rationale of the transaction, I traveled for 3 weeks and met with all of Reinhart's leadership in their 26 distribution centers. I'm even more impressed with their operations customer portfolio and the culture of their organization. I believe the transaction will further enhance PFG's strategic position in the Foodservice distribution industry. In case you missed our call last month, I would like to quickly provide you with the compelling strategic and financial benefits of the deal.

Reinhart is the second-largest private food distributor in the U.S. We believe they are the most attractive private regional foodservice distributor. It expands our geographic reach and overall scale. Reinhart will enhance our PFG's distribution platform and market density. We believe the transaction enhances our complementary operating model, increases the combined companies' depth of differentiated private-label brand offerings, centered around leading produce, protein and logistics. We believe there will be significant synergy opportunities in procurement, operations and logistics. The transaction is expected to close by the end of the calendar year. And finally, the transaction has attractive valuation with compelling financial benefits. Excluding transaction-related depreciation and amortization, we continue to expect double-digit EPS accretion with anticipated tax benefits and full run rate synergies in year 3.

So to wrap up, we had a strong fiscal 2019. Our businesses are performing at or ahead of our expectations. I want to thank all of our associates for another year of tremendous growth. I welcome the Eby-Brown associates and look forward to growing that business.

With that, we'd be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Edward Kelly of Wells Fargo.

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Edward Joseph Kelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [2]

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George, I wanted to ask you, just to start, about the competitive environment. I was hoping you could just provide some update on what you're seeing there. I mean Sysco obviously mentioned earlier this week about some pockets of increased competition. I'm curious as to whether you're seeing any of that? Where you think it's coming from and why?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [3]

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Well, I think things have been very competitive for quite a while, maybe forever in this business. I do feel on the independent area that everyone is extremely focused on it and I think when you get that level of focus, it does get very competitive. I just don't see it as highly different though from what it's been in the past.

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Edward Joseph Kelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [4]

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Okay. That's helpful. And then I wanted to ask you generally about the consumer. I mean you don't typically get this question, but there's been, I guess, in the marketplace overall, just some growing concern about the consumer. I'm curious as to what you're hearing from the field, from your sales force as they interact with your customers? Maybe just a pulse on their level of confidence.

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [5]

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I would always characterize our people as confident. I think that what is different is it's not as consistent. Typically, if you're running maybe mid-single-digit case growth, a really good week might be 7 and a really bad week might be 3. And we see wider swings than we've seen in the past, but it ends up kind of year-to-year to be pretty similar. One thing that is definite for us is within our independent base, we have had another quarter where our line items are growing faster than our cases are growing. So that does show me that we're continuing, at least within our customer base, to see some same-store sales struggles for the independent. And we're continuing to see difficult times for large casual dining chains.

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Edward Joseph Kelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [6]

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And just one last one for you, George, on Eby-Brown. You've had it in-house for a few months now. Can you provide maybe just a little bit more color on the capture of revenue synergies? How quickly you can leverage the C-Store relationships on the Foodservice side? I would assume that, that's actually probably relatively decent margin business. I mean there hasn't been a lot of talk about that as an opportunity, but it seems like it would be accretive to your EBITDA growth in the coming years. And I'm just kind of curious as to how excited you are about that and how material that possibly could be.

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [7]

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Well, we had 9 weeks of shipments in the last fiscal year, so not much of an impact last year. We feel that there will be -- for Foodservice, within the convenience area, there'll be some situations where we'll be delivering it with 2 trucks where they have enough Foodservice business where the Foodservice division will also deliver if the SKU base is beyond what we can put into an Eby-Brown facility. We're doing a little bit of cross dock where we're early stages, but where we're delivering out of performance Foodservice and merging it into the Eby-Brown loads. And then we also plan to increase the number of SKUs handled at the Eby-Brown distribution centers, but we're in the very early stages of determining what those SKUs will be.

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Operator [8]

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Our next question comes from the line of Chris Mandeville of Jefferies.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [9]

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Jim, can I just start off with a point of clarification very quickly on Eby-Brown. The sales contribution in the quarter, the $950 million, was that actually gross sales, not net?

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James D. Hope, Performance Food Group Company - Executive VP & CFO [10]

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Yes. That's gross, and you have to back out the tobacco excise tax number we gave.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [11]

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Okay. And then is there any additional color on how we should be thinking about EBITDA growth cadence this coming year that stands seeing how, obviously, we don't have Reinhart in the numbers right now, but given some of the seasonality, as you incorporate Eby-Brown, any other factors that we should be considering? And then just lastly, can you offer any additional color on what sort of expansion projects do you have in mind for Eby as well?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [12]

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Yes, I'll go ahead and take that. As far as the EBITDA cadence, I think that we're always better to speak in a year time frame because we've been very consistent year-to-year, less so quarter-to-quarter. I will say that we're off to a very strong start. And our first quarter is looking a lot like our fourth quarter. But once again, we're only a little less than halfway in. As far as seasonality goes, the summer is a good time for Eby-Brown but that, in the scheme of things, it's not real material to us. When we close with Reinhart, Reinhart is a different seasonality than we are. Their business is very heavy in the far north, so our fiscal third quarter there, much weaker than, say, Performance Foodservice. And when you get to the fiscal fourth quarter and the fiscal first quarter, they're a little bit stronger.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [13]

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And then just anything on the projects for Eby-Brown in the coming year?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [14]

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We do plan on building a couple of distribution centers and we'll be doing those really over the next about 18 months. I mean that, at this point, is all [we have] planned for Eby-Brown, it's just those 2.

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Operator [15]

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Our next question comes from the line of Andrew Wolf of Loop Capital Markets.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [16]

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With regard to the guidance for organic case growth of 3% to 5% for 2020 against the 3% in '19, can you discuss what parts of the sales mix are planned to accelerate if you get above the 3%? And what would be driving that?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [17]

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Well, Vistar continues to grow well. I think it's going to be pretty broad-based. I mean if you look at our Performance Foodservice business right now, all areas of our business are growing in that mid-single-digit area. And we expect that to continue for pretty much the foreseeable future. Not sure with Eby at this point, I don't think we have enough experience in how their seasonality works, and obviously, tobacco is a declining category. But I think that our growth will be pretty consistent across our portfolio of businesses.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [18]

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Got it. Okay. Can you, George, comment on kind of the productivity of new salespeople? Is that continuing to -- is there a sort of maturation that's going to come into the numbers too? Or is that -- or they have kind of reached their peak -- and they've peaked in terms of their contribution rate to new sales?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [19]

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Yes. Well, we're looking to continue to add people and I feel that will help us. Our average sales per salesperson has gone up significantly in the last 10 years, I mean, well over double. And we are seeing that as they get to a certain volume, it's difficult from a percentage standpoint for them to get the growth they have gotten in the past, and we're adjusting to that. We're trying to give them tools where they have time to still write more volume. Some of our people are in a position where they're willing to take a reduction in the amount of business they handle so that they have time to go out and get some good quality business, and we just have to adjust, Andy, and that's what we're doing.

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Andrew Paul Wolf, Loop Capital Markets LLC, Research Division - MD [20]

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Got it. And if I could just ask a quick question, just kind of a follow-up on the Eby-Brown, some of the questions. When you think about Foodservice products or programs in a C-Store channel, does Vistar have already exactly transferable product types? Or does some have to be tweaked -- some that exist to be tweaked a bit for C-Stores or just created because different types of foods are bought -- Foodservice are bought at C-Stores than maybe at a hotel pantry or other things that Vistar currently supplies?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [21]

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Vistar doesn't stock a very wide assortment of Foodservice products. And most of the Foodservice-type products that they're stocking are geared to the concessions area. So we have a lot of work to do there in our Performance Foodservice. We have a much greater array of product and we're focusing our time right now on what's stocked at Eby-Brown versus what's stocked at Performance Foodservice and doing our best to involve customers and make the right decisions around what items that we will stock at Eby and particularly, around our branded products. So we're in the early stages, but we feel good with it. We have a heavy focus on pizza because we have a heavy focus on pizza as a company. And we just think that's a great part of our future, this Foodservice into the convenience environment.

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Operator [22]

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Our next question comes from the line of John Heinbockel of Guggenheim Securities.

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John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [23]

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So George, 2 related things maybe. When you think about salespeople hiring for this coming year, is that, directionally, same sort of growth as the past 12 months? Or would you like to accelerate that a little bit? And then secondly, when you think about penetration with existing accounts, are there some good productive ways to kind of accelerate that rate of expansion maybe against some of your competitors who are secondary suppliers, right, to these accounts? Can you do that absent price in some other way?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [24]

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Yes. Well, we'll start as far as with the salespeople and the number. I would say that we are always in a position where we want to add salespeople faster than we are. It is a job, and I would say a profession where you have to be careful with the hires you make. It's a big investment. There's a significant amount of training and it's a difficult job. There's a lot weekend work -- there's a lot of things that you need to do in that job that not everybody wants to do. So I'd say, for us, the limiting factor for us to grow our sales force is just finding real quality, competent people that can develop just a tremendous appreciation for that job. And you have to because it's, like I said, it's a very difficult job. As far as penetration, most of our focus there is training with our salespeople, and as a company, I think it's hard to impact independent customers as a company, it's really more as an individual, and a lot of it is you're adding SKUs to an account because they tend to be pretty sticky in this business. It's literally cutting that product and what you have against what the competitor has and having some differentiation in product. Otherwise, it does come down to kind of a margin erosion exercise if you don't do that.

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John Edward Heinbockel, Guggenheim Securities, LLC, Research Division - Analyst [25]

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And then maybe secondly, if you look at drop size, right, for both Vistar and for PFG Foodservice, what's sort of been the trend there? I assume it's growing. Is it growing faster than it was, say, a year ago? And I would guess you're getting leverage, or maybe you're not because of driver pay going up, getting leverage on that process.

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [26]

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Our drop size has continued to go up very consistently. That's one of the pleasing part of our business today. And if we got back as an industry to same-store sales growth, it would have a bigger impact than it's having today because it takes more line items to get those larger drop sizes. We have increased driver pays, so that reduces the impact of getting a bigger order. But today, that larger order is a good bit of what's driving our business. So very important that we continue to do that. But it is really kind of belly to belly kind of business and getting those extra SKUs.

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Operator [27]

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Our next question comes from the line of Judah Frommer of Crédit Suisse.

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Judah C. Frommer, Crédit Suisse AG, Research Division - Senior Analyst [28]

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Just going back to competition within the independent segment for a second. You guys do have a different definition from Sysco of independent, and it sounds like there's been some more competition in kind of those small regional chains, I don't know, call it, 5, 10, 20 store chains. Are you seeing any elevated pricing action there as opposed to the much smaller mom-and-pops? Or is it consistent across both of those segments?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [29]

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Well, region was exactly how we classify them and we do them once they hit 5 units. And we're actually doing a little better with that type of customer than we have been in the past, but it's always been our slowest growth area. And I would classify it as a very competitive type of customer to get from the competition. It's a very competitive part of our business.

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Judah C. Frommer, Crédit Suisse AG, Research Division - Senior Analyst [30]

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Okay. That makes sense. And -- yes, go ahead.

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [31]

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Yes. And our definition is just that, once they hit the fifth unit, then we redefine them as a regional as opposed to an independent, and we've been real consistent around our definition for the last 11 years.

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Judah C. Frommer, Crédit Suisse AG, Research Division - Senior Analyst [32]

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Okay. That's helpful. And then switching to kind of Vistar expectations for the coming year. We did see some chocolate or candy price increases. How does that factor into the expectations for this segment this year?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [33]

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Well, to a degree, we'd like to see a price increase. We tend to make some money when that happens. It also can impact demand for a short period of time, at least. But our largest channel is vending, and the vending price, it's a separate SKU and a separate box. And those prices have not been increased, at least at this point.

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Operator [34]

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Our next question comes from the line of Jeffrey Bernstein of Barclays.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [35]

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A couple of questions. Just first on the sales topic. I was just wondering if you can provide some color on maybe the chains versus the independents, maybe health and transfer [age]. It seems like you commented that the casual dining chains are struggling. And that you mentioned the independents are seeing maybe flat comps. Just wondering, is there any differentiation between them and what keeps your momentum strong? Or what keeps you believing that you're not going to be impacted by what seems to be a challenge for both the big chains and the independents?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [36]

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Yes. Well, the big chains, we are continuing to see the case counts drop there. And probably to a great degree, not much we can do about that except give them all the support we can give them. And it's not across-the-board, but it is a struggling category. With the independent, we don't have a high market share. We really don't have a high market share in any market even where we're -- we consider ourselves to be very successful. So we feel we can continue to show mid-single-digit type growth through new accounts and then just continuing to add line items to existing accounts. In one area that we've done a particularly good job of late, and that's our lost business continues to decline. And that's been a big help for us to offset kind of this lack of what we see as same-store sales growth. And then in the chain world, there are still chains out there that are fast casual, even some smaller QSR ones that are really putting out great growth. So it's not a situation where everybody is flat to down, there are some significant winners today and we are fortunate enough to have some of those accounts.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [37]

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Understood. And then just in terms of July and August trends, I mean, you seem encouraged with the start of the year. It's interesting to listen to restaurants talk about a slowdown in the past month or so, choppy sales similar to what they saw earlier this year, yet there's not much explanation for it. I'm just wondering, one, whether you're seeing something similar and maybe why or why not?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [38]

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Well, we are off to a very strong start, and like I said, it's not even half a quarter, so I hate to get ahead of our skis with that. But where we're getting the growth is it's new customers and it's new items, and I would characterize the market as being a little soft. And I would also say, it continues to be choppy week-to-week. We try not to get too excited when we have a couple of really good growth weeks back to back because it tends to get followed by a week that kind of equalizes everything.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [39]

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Understood. I mean just lastly, on the commodity front, I mean, I think you mentioned that your basket increased sequentially from 3Q into 4Q. I'm just wondering what you're forecasting as a basket inflation on commodities for fiscal '20? Whether you're anticipating further accelerating inflation, maybe some thoughts on proteins?

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James D. Hope, Performance Food Group Company - Executive VP & CFO [40]

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Yes. We still think that 2% is a fair number and a reasonable number and I think when you model in a range of anywhere between 1 to 2, and we see product categories moving in the same direction that they have been this year.

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [41]

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We've got a pretty exhaustive look at inflation and what we're experiencing today is a greater delta between case growth and dollar sales growth than we have inflation. So our business seems to be moving a little bit more towards higher case cost items and a little bit more center of the plate. So that's why there's kind of a gap between those numbers for us.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [42]

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Do you have a similar forecast of inflation for labor? Like you said, COGS 1 to 2, like how do you think about labor basket relative to COGS?

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James D. Hope, Performance Food Group Company - Executive VP & CFO [43]

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Yes. I wouldn't want to talk about a specific number, but I would tell you that we are continuing to look at labor as a slight headwind. I think the company has done a great job of managing it. I think Foodservice has really stepped up their ability to manage labor, but labor is still a challenge, and I'll leave it at that.

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Operator [44]

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Our next question comes from the line of Kelly Bania of BMO Capital.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [45]

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George, just as you talk about independents and your ability to drive some new growth there and maybe improve some of the lost business, can you just maybe talk about what you feel like is differentiating PFG in the industry right now? And how you're driving that kind of outperformance?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [46]

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Well, one thing that helps us is we have a low share, so I'll put that as a benefit. I just think you need to make calls and you have to have good product and good service. We've invested pretty heavily in people and I think that, that's paying off for us. I mean we'd rather have less than 8% growth in expenses, but we try our best to look at that as an investment in people that we'll get a return on. And so far, that's working out in most markets for us. But I don't know that we're all -- our approach is all that different from anyone else.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [47]

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Okay. That's helpful. And you touched a little bit on labor, but maybe just as we think about the fiscal '20 outlook, just what's in your plan for freight and fuel and some of those other kind of areas that have been pressures over the last couple of years?

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James D. Hope, Performance Food Group Company - Executive VP & CFO [48]

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Yes. Those things continue to be pressures. And as a food distribution company that lives in that world, we continue to manage it well. I don't see any dramatic changes and how next year lines up to this year. And I believe that the guidance we gave is pretty clear and we feel confident about it.

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Kelly Ann Bania, BMO Capital Markets Equity Research - Director & Equity Analyst [49]

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Okay. That's helpful. And then maybe just one more on Vistar. That kind of high single-digit growth again, can you just break that down a little bit for us in terms of same-store sales, new consumer wins? And then the outlook for that in fiscal '20?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [50]

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Yes. The bulk of their growth, the big percentage of it is just new customer wins. And we think that will continue to take place. In the vending area of micro markets and micro kitchens we feel it's probably the bulk of the growth, although since we're not to the end user, we don't have good insight into that. But just from talking to our customers, I think we find that their vending business is pretty flat and those other 2 areas of business, they have really good growth. Theater, that's a big part of our business, but we're pretty much going to mirror the industry as far as growth goes. What is helping us with theaters is as they've sort of a wider SKU base, that tends to help our sales. But it's really new businesses and expanding within channels where we don't have a great share. And of course, we're -- we feel that convenience business is going to be a big win for us. And as we get Retail East built, that will help our pick and pack business and give us a little wider geography that we can give next-day service to, and that will also help our sales.

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Operator [51]

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Our next question comes from the line of Chris Mandeville of Jefferies.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [52]

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George, just in light of Reinhart and given that you guys seem as though you're quite confident in there being little push back from the SEC, can you or Jim just speak maybe long-term CapEx expectations?

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James D. Hope, Performance Food Group Company - Executive VP & CFO [53]

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Yes. The long-term CapEx expectations for Reinhart as we talked about on the day we made the announcement are reasonable. And they have a fair level of maintenance CapEx. And I don't believe that I see anything that's out of the ordinary for them in the long term. We will blend them into our CapEx budget and manage them appropriately.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [54]

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Okay. So in totality, maybe something along the lines of 1% of sales is appropriate for the business as a whole being PFG?

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James D. Hope, Performance Food Group Company - Executive VP & CFO [55]

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That's correct.

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Christopher Mandeville, Jefferies LLC, Research Division - Equity Analyst [56]

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Okay. And then if I recall correctly just on the sales force being a little bit less productive versus PFG team, something like 0.8x, George, given your recent tour of the facilities and what you know of the business, I guess can you just remind us, is that a function of them not servicing necessarily enough accounts? Or are they simply seeing less penetration on a per account basis? And is it more pronounced in any given comps of their segment? And then I guess just thinking about whatever might be the issue there, how does one remedy that? Can you just simply alter maybe drop size? If that has somewhat of a limiting factor on things? Or is it a matter of altering compensation in some manner?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [57]

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I think the biggest key is going to be increasing the SKU base, the items that are available for them to sell. Not unlike us, they have some subscale facilities that don't really have the SKU base that they need to put out the growth that they should have. I think the biggest advantage we'll get is just focus. We'll just be very, very focused on that segment. It's important to us. And that, I think that's probably the biggest thing that we'll benefit from is just having that high level of focus.

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Operator [58]

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Our final question will come from the line of Bob Summers of Buckingham.

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Robert William Summers, The Buckingham Research Group Incorporated - Research Analyst [59]

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Just can you give us an update on freight cost? I think that last quarter you were starting to get some relief on the inbound side. I'm wondering if that's continued. And what the expectation is over the next couple of quarters? And then on inflation, I'm curious, dig a little deeper in terms of center of the plate thoughts, particularly, as it relates to the knock-on effects from African swine fever. And maybe remind us at what level of inflation do we start to see demand destruction?

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James D. Hope, Performance Food Group Company - Executive VP & CFO [60]

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Yes. Look, on inflation, nothing exciting there. I feel pretty good about it. On the protein area, absent of an event like you're describing there, coming in and putting a whole lot of pressure, I don't see any big change. On freight -- yes, on freight, you know what, look, we are still doing as well managing inbound freight as we have in the past 2 years. I feel confident in our ability to continue the momentum we have there. I'm not seeing anything overly concerning from a freight cost standpoint. And you're right, we saw a little bit of relief, but I think that freight cost ebbs and flows based on different cycles. And we are positioned to handle both part of the cycle well.

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Robert William Summers, The Buckingham Research Group Incorporated - Research Analyst [61]

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Okay. And then I think this might have been touched on a little earlier, but regarding Eby, one of the more compelling thoughts behind the acquisition was the opportunity set or the capabilities that it provided you. And I'm kind of curious as to how some incremental contract discussions have gone. Is there any update that you can provide there?

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George L. Holm, Performance Food Group Company - President, CEO & Chairman [62]

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It's been helpful, at this point, with one account. But I think we're real early in this and I think that we just need to know more about that tobacco part of the business. But it has helped us in one instance and one instance only at this point.

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Operator [63]

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And that was our final question. I'd like to turn the floor back over to Michael Neese for any additional or closing remarks.

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Michael D. Neese, Performance Food Group Company - VP of IR [64]

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Thank you, Maria, and have a great day.

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Operator [65]

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Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.