Q4 2023 Performance Food Group Co Earnings Call
Participants
Bill Marshall; VP of IR; Performance Food Group Company
George L. Holm; Chairman & CEO; Performance Food Group Company
Patrick Hatcher; Executive VP & CFO; Performance Food Group Company
Alexander Russell Slagle; Equity Analyst; Jefferies LLC, Research Division
Andrew Paul Wolf; Senior VP & Senior Research Analyst; CL King & Associates, Inc., Research Division
Brian James Harbour; Research Associate; Morgan Stanley, Research Division
Carla Marie Casella Hodulik; MD & Senior Analyst; JPMorgan Chase & Co, Research Division
Edward Joseph Kelly; Senior Analyst; Wells Fargo Securities, LLC, Research Division
Jake Rowland Bartlett; VP; Truist Securities, Inc., Research Division
Jeffrey Andrew Bernstein; Director & Senior Equity Research Analyst; Barclays Bank PLC, Research Division
John Edward Heinbockel; Analyst; Guggenheim Securities, LLC, Research Division
Joshua C. Long; MD & Research Analyst; Stephens Inc., Research Division
Kelly Ann Bania; Director & Senior Food Retailers Analyst; BMO Capital Markets Equity Research
Mark David Carden; Associate Director and Associate Analyst; UBS Investment Bank, Research Division
Presentation
Operator
Good day, and welcome to PFG's Fiscal Year Q4 2023 Earnings Conference Call. (Operator Instructions) I would now like to turn the call over to Bill Marshall, Vice President, Investor Relations for PFG. Please go ahead, sir.
Bill Marshall
Thank you, and good morning. We're here with George Holm, PFG's CEO; and Patrick Hatcher, PFG's CFO. We issued a press release this morning regarding our 2023 fiscal fourth quarter and full year 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 2022. The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found in the back of the earnings release.
As a reminder, in the fiscal first quarter of 2023, we updated our segment reporting metrics to adjusted EBITDA from the prior EBITDA metric. Accordingly, the segment results for the fourth fiscal quarter of 2022 have been restated to reflect this change.
Our remarks on this call and in the earnings release contain forward-looking statements and projections of future results. Please review the cautionary forward-looking statements section in today's earnings release and our SEC filings for various factors that could cause our actual results to differ materially from our forward-looking statements and projections.
Now I'd like to turn the call over to George.
George L. Holm
Thanks, Bill. Good morning, everyone, and thank you for joining our call today. PFG had an outstanding fiscal 2023, and we are proud with what we were able to accomplish. More importantly, we are just as excited about the upcoming fiscal year, which we believe will include additional growth opportunities and continued financial success for our company.
As you can see from our press release this morning, we are growing our highest-margin businesses, continuing to pick up market share in independent restaurants and building upon our strengths in Convenience and Vistar. Our disciplined cost controls and focus on our financial position have enabled us to continue to invest behind growth opportunities while returning cash to stockholders.
As you saw, we began to repurchase shares during the fiscal fourth quarter. Patrick will have more details to share about this program, but I wanted to highlight our buyback activity as a vote of confidence in our long-term business prospects. We plan to continue to reward our shareholders as we have financial success, and we are excited about the company's future.
We are just over a year we moved from our Investor Day when we laid out our vision for the future and set 3-year financial targets. We are just as confident today as we were then. In fact, the 2023 fiscal year progressed even more favorably than we had originally anticipated.
At this time last year, we discussed our 2023 outlook, which included a net sales range of $56 billion to $58 billion and adjusted EBITDA between $1.15 billion and $1.25 billion. I'm pleased to report that our net sales results came in above the midpoint of that original range and adjusted EBITDA was $163 million above the midpoint of the target we set last year.
I am proud of our organization's ability to accomplish these milestones and navigate what at times was a difficult operating environment.
This morning, we also reiterated our previously announced long-term targets. We remain confident in these projections, particularly after such a strong fiscal 2023. As you saw in our earnings release, the top end of our fiscal 2024 adjusted EBITDA guidance is already at the low end of our fiscal 2025 target.
Let's discuss the key components that are driving these strong results. Our Foodservice business is on excellent footing. We finished fiscal 2023 with fourth quarter independent case growth of 7.6% and a 6.2% increase for the full fiscal year. This is an outstanding result, especially given more difficult comparisons from the prior fiscal year period.
Importantly, our independent case growth continued to accelerate at the start of fiscal 2024, coming in at about 9% in the first few weeks of the quarter. The investment in our sales force is paying off. So far, during the first quarter of fiscal 2024, we have seen consistent increases in independent cases per salesperson. We believe there is a long tail for our growth in independent restaurants, particularly as new members of our sales team continue to hit their stride.
Within independent restaurants, Performance Brands were approximately 52% of total sales, again, showing the strength in our organization and our lead products. On the chain side of our business, some underlying weakness remains in foot traffic and the resulting case volume performance. However, due to our strong independent case growth, total Foodservice cases were up year-over-year.
In the quarter, Foodservice experienced mild deflation of approximately 1.2%, a bit below where we had expected. While this did impact the top line performance, we grew Foodservice adjusted EBITDA to $273 million, an all-time high for that segment. While we expect inflation to normalize as fiscal 2024 progresses, the structure of our business, including our fee-based contracts and pricing mechanics in the field should allow us to continue to successfully grow profit even in a low inflation or deflationary environment.
Underpinning our strong Foodservice results are positive trends in several important metrics. In the independent restaurant channel, cases per drop increased compared to prior year. As a result, we are seeing improvements in customer cases per week as our penetration improves and overall volume growth accelerates.
As we highlighted last quarter, we continue to add new independent accounts at a rate similar to our total independent case growth, keeping our pipeline of new business strong for future periods. This is resulting in share gains for the independent channel.
We are leveraging these top line trends through continued focus on operating expense control, particularly in labor. Combined personnel expense per case for delivery and warehouse workers were down year-over-year, driven by improvements in lower contract labor costs and stable overtime expense. We are simultaneously investing in our sales force, which is driving our strong independent case growth.
All these factors combined produced a strong finish to fiscal 2023, particularly in the independent restaurant space. We're excited for what fiscal 2024 has in store for our Foodservice operations.
Vistar had another outstanding quarter, finishing off a very strong fiscal 2023 despite challenging inventory gain comparisons, Vistar adjusted EBITDA increased 31.5% in the fiscal fourth quarter. Solid 18% top line sales growth was a result of case volume increases and the continued benefit from higher rates of inflation. Year-over-year case increase as a result of strength in value, theater and office services. We're excited about the performance of Vistar, particularly given the strong pipeline of new business opportunities.
Inflation at Vistar remains elevated and it was roughly 13% in the fourth quarter, which was a slight decline from the mid-teen inflation rate in the prior 3 quarters. We anticipate a deceleration in inflation at Vistar, especially as we begin to lap price increases from the prior fiscal year period.
Lower delivery and warehouse costs per case boosted bottom line results, helped by lower fuel prices and freight cost favorability. Vistar had a stellar fiscal 2023, and we are excited for its prospects in the coming fiscal year.
Our Convenience business performed well in the fiscal fourth quarter despite significant inventory holding gain headwinds. As we have discussed on past earnings calls, the Convenience segment will continue to experience one more quarter of higher-than-typical inventory holding gains. However, we feel confident in the underlying momentum of our Convenience business and its long-term prospects.
Let's take a moment to discuss Convenience in more detail. After a successful entry with Eby-Brown in 2019, we then acquired Core-Mark in 2021, becoming one of the largest providers to the Convenience store industry. Today, we operate under one brand, Core-Mark, with the unified structure and vision to grow our share and leverage our Foodservice and manufacturing capabilities. The channel provides a significant opportunity for PFG with a total addressable market of approximately 195 billion across 150,000 outlets most located within 1 to 2 miles of their customer base.
This proximity has led convenience retailers to expand their store footprints and product mix, lessening their reliance on fuel and tobacco. We believe these trends play to our strengths at PFG as we work to combine our Convenience expertise with vast Foodservice resources to bring something exciting to the channel. Our efforts are paying off as we find ourselves engaged in Foodservice discussions with over 30 small to midsize chain operators, along with countless independents representing thousands of retail store locations across the U.S. and Canada.
Beyond our efforts at Core-Mark, we are also growing the channel through Performance Foodservice, supporting advanced food concepts across Convenience. The channel is evolving and Foodservice is at the heart of that innovation. PFG is here to capture that growth opportunity. Our progress has been impressive, and we believe this is just the beginning.
In closing, PFG had an outstanding fiscal 2023 and enters 2024 with momentum across our business units. We believe we are well positioned to continue our success in the market, particularly in the areas of our business that generate high profit and returns. Our exposure to a wide range of products, channels and customer types provides resiliency in various economic scenarios.
As presented in our guidance and long-term outlook, we are confident in our ability to produce strong results for the foreseeable future.
I'll now turn the call over to Patrick, who will provide additional detail on our financial performance and outlook. Patrick?
Patrick Hatcher
Thank you, George, and good morning, everyone. This morning, I will start with a review of PFG's financial position and capital allocation priorities and provide some additional detail on the operating environment. I'll then review our fiscal fourth quarter 2023 results and finish with a summary of our outlook for fiscal 2024 and beyond.
PFG finished fiscal 2023 in a strong position, posting solid case growth and record net revenue despite slowing inflation through the quarter. This resulted in double-digit gross profit improvement year-over-year and adjusted EBITDA above the upper end of our previously announced guidance range for fiscal 2023.
Our business model is showing its resiliency with strong results across the 3 segments, with particular areas of strength in each. We believe that this structure and our exposure to unique channels through Vistar and Convenience, provide an advantage over our competition. In particular, the high volume of consumer packaged goods products sold by Vistar and Convenience provide insulation from the impact caused by some of our more volatile inflationary dynamics in the Foodservice space.
Still, our Foodservice organization did a fantastic job executing through the fiscal year, including the fourth quarter when inflation swung negative. We do not expect a long cycle of deflationary pressure in Foodservice and have seen signs of stabilization in some categories, particularly in protein like beef and cheese. With that said, we believe our Foodservice business can succeed in a range of scenarios as seen in the fiscal fourth quarter.
This is demonstrated by our outlook for fiscal 2024 and beyond, which I will discuss in more detail shortly.
Let's start by discussing a few specifics on our leverage, cash flow and capital allocation priorities. Last year at our Investor Day, we announced our 3 key strategic priorities: consistent, profitable top line growth, adjusted EBITDA profit margin expansion and leverage reduction. We have made significant progress in all 3 areas, but I would like to focus on the third item, leverage reduction.
As you know, we have a stated leverage target of 2.5 to 3.5x net debt to adjusted EBITDA. By the end of the fiscal third quarter, we had achieved the midpoint of that range. And this quarter, we made further progress finishing the fiscal year at 2.9x net debt to adjusted EBITDA.
I am proud of our organization's disciplined approach to our balance sheet and believe we are now at a very comfortable level of leverage.
What does this mean for PFG? First, we will continue to focus on our leverage to maintain a healthy balance sheet position going forward. With that said, our current financial position has provided additional flexibility in our capital allocation priorities. As you saw in this morning's press release, we began repurchasing shares during the fiscal fourth quarter as part of the previously announced $300 million share repurchase plan authorized by our Board last November.
We anticipate making future strategic share repurchases pursuant to this plan, subject to marketplace conditions. Additionally, we will continue to invest behind the business through growth capital expenditures and investments in technology.
We have a history of executing value-creating M&A and intend to continue to be active in this area if the right deal at the right price presents itself. We believe that these areas will continue to drive long-term value for our stockholders. All of this is possible because of the strong cash flow our business generates.
Through the 12 months of fiscal 2023, PFG generated $832 million of operating cash flow. After accounting for approximately $270 million of capital expenditures, PFG generated $562 million of free cash flow over the past 12 months.
With that, let's quickly review some highlights from our fiscal fourth quarter. PFG total company net sales increased 1.9% in the fourth quarter to $14.9 billion. Our net sales performance was driven by approximately 2% organic case growth, including strong 7.6% independent restaurant case growth and improvement in Vistar channels offset by lower levels of year-over-year inflation.
Total PFG gross profit increased 12% compared to the prior year's quarter. Gross profit per case was up $0.62 in the fourth quarter compared to the prior year's period. In the fourth quarter, PFG reported net income of $150.1 million and adjusted EBITDA increased about 8% to $385 million.
Total company inflation continued to moderate due to deflation in the Foodservice segment. Total company cost inflation was 4.6% in the quarter. The deceleration was driven by our Foodservice segment, which experienced 1.2% deflation in the fiscal fourth quarter. Vistar inflation slowed a bit during the fourth quarter but remained elevated relative to historical rates, increasing at a low teen level. Inflation in the Convenience segment also dipped slightly moving below 10% for the first time since the fourth quarter of last year.
We continue to expect lower levels of inflation during fiscal 2024, which is the assumption embedded in our outlook. We believe that decelerating rate of inflation is manageable, as shown by our improvement in gross profit per case in the most recent quarter.
Diluted earnings per share was $0.96 in the fourth quarter and adjusted diluted earnings per share was $1.14.
As you saw in our earnings release, we announced guidance for the full year fiscal 2024 and the first fiscal quarter. As you are aware, we will have one more quarter of higher-than-normal inventory holding gain comparisons, which will then normalize when we reach the fiscal 2024 2nd quarter. We anticipate net sales between $14.7 billion and $15 billion and adjusted EBITDA in the $360 million to $380 million range during the first fiscal quarter of 2024, despite the inventory holding gain comparison.
Let's review our specific targets for the full fiscal year 2024. For the full year, we anticipate net sales in the range of $59 billion to $60 billion, adjusted EBITDA is expected to be in the range of $1.45 billion to $1.5 billion. We have also reiterated our long-term outlook, which includes net sales in the range of $62 billion to $64 billion and adjusted EBITDA between $1.5 billion and $1.7 billion in fiscal 2025.
As George mentioned, our strong 2023 results, coupled with underlying business momentum for fiscal 2024 suggest that the lower end of our long-term adjusted EBITDA range is possible a fiscal year early as indicated by our 2024 outlook.
To summarize, we are very pleased with how we finished fiscal 2023 and have high expectations for the upcoming fiscal year. We continue to make progress on our 3 focus areas: sustain profitable sales growth, adjusted EBITDA margin expansion and lower leverage. The strength of our business results, solid cash flow generation and healthy balance sheet has enabled us to begin repurchasing shares, another value-creating use of cash for our shareholders.
Our organization is executing our strategy and we believe we are well positioned to continue our success and create value for our stockholders over the long term.
Thank you for your time today. We appreciate your interest in Performance Food Group. And with that, we'd be happy to take your questions.
Question and Answer Session
Operator
(Operator Instructions) And our first question will come from Edward Kelly with Wells Fargo.
Edward Joseph Kelly
Nice quarter. Could we start with that gross profit per case. Another quarter of good strong performance of gross profit dollars relative to case volumes. And this is with a little bit of deflation in the Foodservice segment and obviously lapping the procurement gains. How do you think about the relationship of gross profit dollar growth versus case volume growth in '24 with the continued deceleration of inflation. And there's a lot of positive mix in the business. But George, maybe could you just talk about how we should be thinking about that relationship?
George L. Holm
Well, mix is the big issue, particularly with independent growing at a good rate and our national accounts in a declining mode right now. I think that we'll do well for rest of the year. You'd mentioned overcoming the inventory gains. When you think about those, that's not really additional cases sold, you're getting that gross profit.
And our other businesses outside of Foodservice is really the same thing. Vistar has done excellent contract, feeding business is back really strong, and they're strong in that from a Convenience and micro market and that part of the business.
And then when you get to custom -- our Core-Mark business, the tobacco gains were large and the reason that they were still able to run good margins is their food business is very, very good. And that's where the higher margins are. So once again, it's kind of more mix than getting more from the customer.
Edward Joseph Kelly
Okay. And then just as a follow-up, it's something that you guys seem to emphasize a little bit more on this call today, is related to capital allocation. You guys have been very good at M&A historically, but your stock is also trading, I think, pretty close to a historical trough EBITDA multiple. You could buy more. Could you maybe talk a bit about how you're thinking about the trade-off of all of this, the value of where your stock is today, you're maybe appetite to do a bit more given where the valuation is at this point? And how you think about the opportunity of being strategic with M&A, but also where the stock price is.
Patrick Hatcher
Yes, Ed, this is Patrick. Thanks for the question. As you pointed out, we've talked about our capital allocation strategy multiple times. And with our leverage goal of reducing leverage into that 2.5 to 3.5x and hitting the 2.9 this past quarter, gives us a lot of confidence on how we're managing our leverage. And when we look at what we've projected outwards in the guidance for EBITDA and our ability to continue to pay down debt, we feel really good about where we are with our leverage.
So that allowed us to really look at the fourth pillar, if you will, of our capital allocation strategy, which was to execute on that $300 million share repurchase program that the Board had authorized for us. So as we just reported, we did have some activity this quarter. We look at this as very strategic, and we'll continue, as I made in my comments, to strategically look at that and be in the market at the appropriate time based on several factors.
George L. Holm
Ed, this is George. I'd also add that we will continue to be acquisitive. We haven't been quite as acquisitive of late, and that's not for lack of effort, more for just opportunities on what's out there today, but we feel real confident in future M&A.
Operator
Our next question will come from John Heinbockel with Guggenheim Securities.
John Edward Heinbockel
George, I want to start with your thoughts on Foodservice growth, right? So sales force has been growing very rapidly. What's -- you'll lap that at some point here. What's your thought on the right annual growth rate in the sales force. And then if I think about it, drop sizes up or maybe with inflation is kind of flat, units were up a little bit. That still seems like a big opportunity. When you think about '24, '25, do we get back to a point where account growth and drop size are equally important to that 7.6% or 7%, 8% case growth. Do we see that soon? Or is that going to be pushed out a while?
George L. Holm
Yes. Those are good questions. As far as the growth in salespeople, we've actually continued to take that up, particularly as we got into the fourth quarter of fiscal '23. We've also been able to get where we have our growth as a company and independent is about equal to our growth in people and we're about 1 point shy in growth of accounts as we are sales.
So I think those things bode well because we feel like that we've got a good training system in place. We're going to get good productivity from these new people down the road, that's going to help fuel us there. And just having that increased customer base is going to give us more opportunity for penetration.
And I would say all in all, that there probably is some softness from a macro standpoint. And I think when that comes back, and it will, I think that we'll get much better drop sizes. I think we have these things going in the right direction.
John Edward Heinbockel
Okay. And then a follow-up, maybe talk about the C-store pipeline, right? So we think about their growth -- I think their growth in non-tobacco is still probably well into double digits. If that's the case, when you sort of parse that out, account growth versus their drop size, is there account growth, the bulk of that? Or is drop-size a much bigger contributor?
George L. Holm
More so account growth. Not as -- we don't get as good a number on what the macro looks like when it comes to Convenience. But we feel good about the business. We're continuing to pick up Foodservice business with double-digit growth. And the pipeline is very large. We have a lot of things in the work. It is a long sales cycle, as I mentioned before. But I think we've kind of reached that point where we got things coming in to our company, and we've got accounts that were down that pipeline with and we know we have business coming when their current contracts expire. So we feel good about that growth, and we'll just see where the macro part of that goes.
Operator
Our next question will come from Joshua Long with Stephens.
Joshua C. Long
I was curious if we could dig into some of that underlying momentum you talked about and maybe parse out the strength of new account wins and then wallet share gain opportunity, particularly on the independent side that you're seeing?
George L. Holm
Well, I think that we're still, what I would call, somewhat dependent on new accounts, but we're doing a great job there. And where we've seen an uptick from Q4 to the beginning here of Q1 in our case growth, we've also seen a similar uptick in our new accounts or our total number of accounts versus the previous year.
Wallet share is a little bit harder to tell, we do see that products that we were selling that customer a year ago, and we're selling it to them now in most instances, there's a slight decline. So I would say there -- as I mentioned earlier, there are some macro issues out there, and I think that we're going to continue to push through those as long as we're getting good people and we're training them well and they're going out and getting new business. And it's not that difficult. That's a pretty simple math.
Joshua C. Long
That's helpful. George, in your prepared comments, I think you mentioned or noted a pipeline of new business opportunities in the Vistar channel. Curious if you could dig into that a little bit more in terms of maybe new areas going deeper into current categories? Anything that you're particularly excited about that we could be looking for on the horizon?
George L. Holm
Well, our retail pick and pack business and where we fulfill for other people, that business continues to go well. Micro markets are improving at a fast rate. Theater, surprisingly strong and has been for a while, and we're seeing the office coffee make a come back as people are going from maybe 3 days a week at work to 4 days a week at work. So those areas would be the areas that I would say we're probably strongest in right now as far as growth. The value category, the dollar store area is doing quite well, too.
Operator
Our next question comes from Brian Harbour with Morgan Stanley.
Brian James Harbour
Yes. I would like to ask just about the Performance Brands. You've obviously kind of continued to see sales increase of those. I'm sure it's driven by kind of your independent case growth. But have you also seen kind of within existing accounts, more sales of Performance Brands has the macro perhaps supported that side of the business?
George L. Holm
Our brands are doing very well, and the business is almost entirely with independent customers. You look at our customer base in Foodservice outside of independent, it's basically restaurant chains. So we're doing little to no business with contract feeders in Foodservice or nursing homes or hospitals, those parts of the business, hotels. So we really build our products for restaurants. And where we're seeing the best growth right now is at the higher end of our products from a quality standpoint. So that's really what's driving that.
And by the way -- yes, by the way, Core-Mark also has been adopting these brands and are doing very well with it.
Brian James Harbour
Okay. Great. Just on capital allocation then. Do you have any -- do you have any sort of annual target for how much you might repurchase or do you think this is just going to be purely opportunistic? And then also, how are you thinking about kind of CapEx for this year? Any sort of like increase in growth capital if you're expanding facilities or anything like that? Can you walk us through some of the different components there?
Patrick Hatcher
Yes, I'll answer the second part first. When it comes to CapEx, as we've always stated, that's our #1 priority for our capital allocation is to continue to invest in the business. And as George was just describing, we're seeing great growth in independent cases. So we'll continue to invest for that growth as we've been doing.
And then on the share repurchase, I would characterize as we're trying to be very strategic. I mean we look at a few things. I'm not going to go into too many details, but we do look at historic multiples and relative valuation to help guide us on when we should be in the market and how we should be in the market.
Operator
Our next question will come from Alex Slagle with Jefferies.
Alexander Russell Slagle
Congrats on the success. I wanted to ask on the independent case growth in the fourth quarter. I mean it was really strong and barely below the third quarter level, which I would imagine, had some benefit of lapping Omicron and I guess I just wanted to sort of dive in and just trying to see what the impact of that might have been, and a little bit more view on the acceleration in the underlying case growth that you saw through the fourth quarter, and you talked about the strong trend into the first quarter, but just a little bit more on that step up.
George L. Holm
Yes. If you look at the last 2 quarters, just kind of stepping through the calendar, January was an unusually high case growth month and that had, I think, a lot to do with Omicron. We saw slightly less growth in February and then slightly less growth again in March. And then as we got into the fiscal fourth quarter, the opposite happened where we actually gained momentum each 1 of those 3 months and then gained more momentum in July and actually August so far has been better yet.
So I think that in some ways, that's like what the last 3 years have been like, right? I mean there's always been something that was unusual in each quarter. And I think we finally reached that point where although the industry may be a little slow right now, I think that it's more consistent. And I think it will continue to be more of the seasonal flows that we've typically had in the past.
Alexander Russell Slagle
Got it. And then I wanted to ask on the customer-first digital ordering platform. If you could comment on the rollout progress and how important this will be in driving that favorable mix where you've been seeing that and kind of where digital mix stands now, maybe where that goes in the future?
Patrick Hatcher
Yes. And this is Patrick. I'll touch on that a little bit. Again, we -- as we've commented previously on customer-first as our digital ordering platform, I mean we've been really happy with the progress of the rollout. I believe Vistar is almost complete on the rollout or has completed their rollout and we're making a lot of progress on the Foodservice side as well. We view it as very important.
Again, it's never to replace our sales force. As you've heard from us, we believe our sales force is absolutely a very strategic asset, and we can see that with all our independent case growth. But we do view it as a tool that will actually augment how the salesperson works with the customer and help that customer in their journey with PFG as they order and give them opportunities to order in a much more seamless way online. So we see a lot of value there. And then as we've talked about in the past, eventually will have it across all 3 segments. So we can have customers cross order into Foodservice if they're a Convenience customer or into Vistar as they would like to and as they need to.
Operator
Our next question comes from Mark Carden with UBS.
Mark David Carden
So to start the update on the Convenience business, it was really helpful. It sounds like you guys are seeing a lot of momentum there. From the get-go, you guys were always optimistic about the cross-selling opportunity between Convenience and Foodservice. Just now that you're a little while into it, how has it played out relative to your original expectations? Is it building any faster or slower than you might have expected, either from Foodservice into Convenience or from Convenience into Foodservice? Just has anything surprised you on that front?
George L. Holm
Well, we would like it to have developed quicker, but sometimes things develop better when they don't develop as quick. It took a while. They're really -- when you get outside of the Foodservice part of it, they are 2 different businesses. And the focus at Core-Mark, of course, has been on the store itself and kind of the CPG type product. And this has been a change for them.
But we've got the 2 companies that are really jelling. They've got, like I said, a really good pipeline and we're seeing success in both parts of the business. Our Foodservice people are doing very well going into a Convenience location that we don't have the assortment needed in a Core-Mark.
And we started out with a lot of that just 2 separate thrusts and now we're doing real well doing it together. So we feel great. I mean, we feel it's going to be a lot of our growth here in the near future.
Mark David Carden
Good to hear. And then as a quick follow-up, how close do you guys think you are at this stage to see normalized fill rates at both Vistar and Convenience?
George L. Holm
Well, it's improving all the time. And I would say in our Foodservice business that things are, if not normal, very, very close to normal. What we're finding in the Core-Mark and Vistar business is some of the lack of fill rate that we've had is items that were discontinued during COVID that have continued to be discontinued and in some ways are probably permanently gone. Maybe it will still come back. So that's part of it. And the rest of it is somewhat unexplainable for us. We were frustrated that we don't have better fill rates, but we're also pleased that they're continuing to improve. And it's a pretty widespread that they're not back to normal fill rates in those 2 businesses.
Operator
Our next question will come from Kelly Bania with BMO Capital Markets.
Kelly Ann Bania
It's Kelly Bania here from BMO. I was wondering if we could just talk a little bit about gross margin across the categories. So maybe both was in the quarter and as well as the outlook for fiscal '24. Which segments are contributing to gross margin expansion across Foodservice, Vistar, Convenience and clearly, you characterized the kind of temporary deflation as manageable within that, but the drivers of what supports that being manageable. How much of that is mix or other actions you're taking?
George L. Holm
Well, all 3 businesses, Foodservice, Core-Mark, Vistar have seen gross margin expansion. As I mentioned earlier, it's really mix. Mix is the biggest thing in all 3 of those businesses as to why we're seeing that growth. It's product mix, it's channel mix and then the success of the brands. As far as just aggressive pricing, I would say that's probably not something that we've really done.
Kelly Ann Bania
Okay. And within your outlook for fiscal '24, we should expect continued mix and gross margin to support from those dynamics?
George L. Holm
We should. I guess, if we picked up some large chunks of business in more of the national area, that could have some impact. But the pleasing part of it too is overcoming these inventory gains that we had in fiscal '22 and '23. And we actually, for fiscal '23, by the end of the year, we had less inventory gains than we did in '22. And this is the last quarter that we have to deal with that. And that obviously has helped drive some of this gross profit per case. And without it, we're still seeing good increases. But like I said, it's primarily due to mix.
Patrick Hatcher
Yes. George, if I could just add. I mean, Kelly, if you look at -- for the last several quarters, we've been seeing these trends that show really strong underlying performance by the different businesses. So with our outlook for 2024, yes, we did anticipate that and look at those trends, and that's what helped guide us on that outlook that we gave you.
George L. Holm
Yes, to add still to it. This is -- the quarter we're in right now was the highest that we've ever experienced in inventory gains. And we have great confidence, obviously, with our guidance that we will overcome those gains once again. And then I won't have to talk about it, which it will be really nice.
Kelly Ann Bania
Agreed. Can I just ask maybe one more because you have a pretty broad view of consumer trends, given all of your different segments and end markets. So maybe can you just talk about what you're seeing with respect to trade down, whether it's trade down among price points and case values or trade down among customer type, what you're seeing and what you're expecting as we move forward.
George L. Holm
Well, if you just look at the numbers that get published, QSR, is doing better than certainly casual dining or family dining. And I think to some degree, that's probably an effect of trade down. I would assume that's the case.
I think our value stores doing well and consumable product is trade down, although you look at how good Walmart is doing as well, that's probably a reflection of it as well. And then just to sound confusing, I guess, but it's our higher-end product that is the most expensive product that we're growing the fastest with within our Foodservice independent customers.
So I think it's a mixed bag. When we look at the account level, we are certainly seeing in national accounts that casual dining is just not in favor now, is it? Are they people trading down? Or are they going to independent restaurants, that we have a tough time telling.
Patrick Hatcher
And Kelly, if I could just add to that. When you think about the diversification of our business, and we've talked about this at times about like a week in the life between the 3 different segments and all the different channels that we service, we really feel that if the consumer is trading down or trading up, we'll still capture those sales.
George L. Holm
And for us, this move into micro markets, where they may have had -- may have been a vending environment before, and you can offer different price points and you can offer more product, that is doing really well, and that's doing better at the higher end of those type of products. So I just think it's very, very mixed. But I mean, Patrick made a good point that we're in so many different channels. Although we're missing probably the 2 that are growing the fastest right now being contract feeding and lodging, but from a Foodservice standpoint -- but I think the other channels that we're playing in and that we're really serious about are all doing well.
Operator
Our next question comes from Andrew Wolf with CL King.
Andrew Paul Wolf
George, are you getting any help with the acceleration you're seeing recently in the independent case growth from drop size? Or is it really just being driven by gaining -- I guess, accelerating new account growth?
George L. Holm
We're getting a little bit from drop size, but the bulk of it is coming from accelerated new account growth.
Andrew Paul Wolf
Can you give us any insight on like the relative stickiness of new customers, I guess, with the macro being uncertain, I think you sound hopeful that it will get better or maybe you have -- I think you said it will eventually. But at least from my point of view, still pretty uncertain. How sticky are these new customers? I mean, is that kind of a positive as you're building out the guidance, hey, we got all these new customers coming in. On average, the churn rate is much lower. So we're more confident in the top line even given the macro.
George L. Holm
Well, we keep real detail on lost business is very important. And every year, we've been able to get better at retaining our accounts and retaining our salespeople, both. And if you consider the amount of restaurants that typically go out of business each year, and we've been able to get to very high single-digit turnover from the previous year and customers or lost business. So as we're adding accounts, we feel pretty confident. And particularly with the retention level that we have with our sales force. I think those 2 go hand-in-hand.
Andrew Paul Wolf
Got it. And if I could just ask you as a follow-up on, I think, your commentary on -- was kind of overall expense ratios were down when you combined driver and warehouse. But could I ask you just unpack that a little, at least as of last quarter, understandably, I think you said the warehouse side was a little more productive. But could you talk about that comparison but also how they're progressing each of them separately in terms of becoming more productive?
George L. Holm
Yes. Well, we're seeing constant progress in productivity and shrink. Those are the things that are real problems with new people. We hired heavily. In some areas, we may even overshot some. But we feel we're going to continue to improve. We're certainly not back to 2019 levels and we're paying more money to get a better level of service, but the reduced overtime has helped productivity, not using temporary workers to the degree that we did during the heavy COVID period has really helped a lot.
And then we feel that our expense ratios are going to continue to get a little bit better. A lot of our, I guess, I would say, increase in expense ratios for last quarter was just continuing to add to the sales force. That was our big area of increase over the previous year.
Andrew Paul Wolf
Okay. And just the last one is follow-up, I think your commentary on the Convenience business was that the margins were good. And I believe that was in the context, if you take out the holding gains. But I just wanted to double check that if I heard that right. And if I could, were you really referring to more of the gross margin or would the EBITDA margin have been substantially better if you take out the big, I guess, tobacco holding gain from the year ago period.
George L. Holm
Yes. If you took out the holding gains from the previous year, we were actually well into double-digit EBITDA growth for Convenience. And that was driven somewhat by food sales. I mean, that certainly helps. But from an operational standpoint, warehousing and delivery from where we were COVID to now, they've probably improved the most.
Operator
Our next question comes from Jake Bartlett with Truist Securities.
Jake Rowland Bartlett
My first is wrapping up -- wrapping in a bunch of the other questions or prior questions asked. But when I look at the guidance for '24, it looks like there's at the midpoint about 10 basis points of EBITDA margin expansion. I'm hoping you can help us figure out what the main driver of that is, whether it's operating expense leverage or gross margin expansion? Just trying to kind of parse out which is going to be the biggest source of margin expansion.
Patrick Hatcher
Yes. And thank you. This is Patrick. It's really a combination of both, and it is wrapping up a lot of things we've already discussed. But it's definitely going to be expansion due to things like more independent cases, the brands, obviously, and then, again, Vistar and food and Foodservice into Convenience. And then as George just explained, we do expect the operational side to continue to improve, and we have seen those improvements. And we have a lot of confidence that they'll continue to drive more efficiencies.
Jake Rowland Bartlett
Okay. Great. Because when I look at the operating expenses, less [D&A] kind of the bridge between gross profits and EBITDA. There was deleverage in the last 2 quarters. So I'm just trying to get your confidence that, that will reverse that you think you're going to get some operating leverage in '24.
Patrick Hatcher
Yes, absolutely. I mean, as George says, we've been making some investments in people and -- but we do have a lot of confidence that we will see that leverage.
Jake Rowland Bartlett
Great. And then the last question is on the sales growth trajectory. Lowest in the first quarter, accelerates from there just given the guidance. Specifically on the Foodservice segment, I look at sales growth in the fourth quarter, real sales growth taking out the inflation or the deflation was about flat, that's a deceleration. But what do you think the trajectory of growth -- sales growth in the Foodservice segment is going to be throughout '24? I expect a continued drag from change in the beginning of the year. But if you can just help us determine or just estimate how sales growth progresses or how it accelerates and maybe what the acceleration on drivers are?
Patrick Hatcher
Yes. Well, I mean, again, a lot of this is year-over-year, but we have a lot of confidence in our Foodservice sales growth. As we've explained, we are experiencing deflation in Foodservice, that is continuing into this quarter. So that, coupled with some other factors, we did anticipate that in our outlook. And so it does start off at a lower growth rate. And then it does increase as we go through the balance of the year and get up against easier comps and see that deflation slowly get better and then improve to hopefully, what we would imagine is more of a traditional historical slight inflation number.
Jake Rowland Bartlett
Okay. And just to clarify that, do you expect the Foodservice deflation and become inflationary by the end of the year? Or do you think it's going to be deflationary throughout the whole year?
Patrick Hatcher
No. In our outlook, we believe it will become inflationary.
Operator
Our next question will come from Carla Casella with JPMorgan.
Carla Marie Casella Hodulik
I had a follow-up question on your comments about M&A. Just given the kind of counted the strength and stability of the Vistar and Convenience and total addressable market there. Would you -- is your M&A focus more on those categories? Or is there a opportunity in Foodservice as well?
George L. Holm
We're always going to be opportunistic and things that fit our business and their culture fits our culture, provided we can get to the right valuation, we would probably do M&A in any of those 3 businesses.
Our priority is certainly Foodservice and broadline Foodservice specifically. That's where we have more significant white space and we still have distribution centers that I would call legacy Roma distribution centers where we have limited product offering and expanding that business would probably be our biggest priority. But we will always -- if we have an opportunity to get a good business to be part of us, we think we have good method of doing M&A and integrating companies, we'll always be opportunistic.
Carla Marie Casella Hodulik
Okay. Great. And then could you just update us in terms of when you look at CapEx, how much is growth versus maintenance? Or what is your maintenance CapEx going forward?
Patrick Hatcher
It's about 1/3 is maintenance.
Operator
And our last question will come from Jeffrey Bernstein with Barclays.
Jeffrey Andrew Bernstein
Great. Two questions. First, just George, it seems like the Foodservice chains, the way you're seeing, I think, what you referred to as macro softness in the independents, it seems like you're saying are gaining momentum each of the past 4-plus months which drove that 7.6% case growth. I'm just wondering if all that's true, it would sound like the first fiscal quarter of '24 is ahead of that 7.6%. So I'm just wondering whether you think that's sustainable? And whether you think that's being seen across the entire industry? Or is that just unique to Performance Food Group and your related initiatives? And then I had one follow-up.
George L. Holm
Yes. Well, we're certainly gaining share. But if you look at the percentage of the business that we have, we could be going a different direction than our competitors. And it's probably more likely that, I guess. I mean, you can see with the guidance we've given. I mean, we're taking that macro into account. We're very confident. I would like to say that we're always cautious but I do think there's some macro issues out there, and we've been through this before, and this certainly isn't 2008 or '09. It's not to that degree. And as long as we keep gaining customers, I think we'll keep gaining share, and we're confident with what we've laid out.
Jeffrey Andrew Bernstein
Got it. And then my follow-up, I guess, as we look out to fiscal '25, I think you mentioned your fiscal '24 EBITDA guidance, the high end being $1.5 billion is the low end of the fiscal '25. So clearly, you're moving ahead of plan. I'm just wondering how we should think about that. Should we assume there's, therefore, confidence that in the coming quarters you're going to increase fiscal '25? Or what would potentially derail a continuation of that upside to EBITDA because, again, being ahead of schedule by a full year within a 3-year guidance is quite impressive. I'm wondering what might derail that or make that more challenging?
Patrick Hatcher
Yes, Jeffrey, this is Patrick. Just one, thanks for pointing that out because we are really excited that we had such a strong '23 and that allowed us to put that 3-year guidance at the top end of our range for 2024. At this point, it's a little still too early to comment on anything that would make that change, but you can see what we've guided for 2024. And again, as George just explained, we're really confident about the guidance that we've put out there. So we'll continue to update everyone on that as things progress.
Operator
Thank you. I would now like to turn the call back over to Bill Marshall for any additional or closing remarks.
Bill Marshall
Thank you for joining our call today. If you have any follow-up questions, please contact us at Investor Relations.
Operator
Thank you, ladies and gentlemen. This does conclude today's teleconference, and we appreciate your participation. You may disconnect at any time.
