PFGC - NYSE

Good day, and welcome to PFG's Fiscal Year Q1 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.

Thank you, Shelby, and good morning. We're here with George Holm, PFG's CEO; Jim Hope, PFG's CFO; and Patrick Hatcher, Vistar President and COO. As previously announced, Patrick will be assuming the CFO role for PFG at the start of the calendar year. We issued a press release regarding our 2023 fiscal first quarter results this morning, which can be found in the Investor Relations section of our Web site at pfgc.com. During our call today, unless otherwise stated, we are comparing results to the same period in our 2022 fiscal first quarter. As a reminder, in the second quarter of fiscal 2022, we changed our operating segments to reflect how we manage the business. The 2022 fiscal first quarter results have been restated to reflect the segment change. The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found at the back of the earnings release. With this fiscal quarter, we have updated our segment reporting metrics to adjusted EBITDA from the prior EBITDA metric. Segment results for the fiscal first quarter of 2023 and the fiscal first quarter of 2022 now 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.

Thanks, Bill. Good morning, everyone, and thank you for joining our call today. We're off to a fast start in fiscal 2023, with top and bottom line results exceeding our guidance and a strong backdrop for continued success. Contribution from all three operating segments shows our company's broad based strength across channels. In foodservice, we continue to pick up market share in independent restaurants while showing operational improvement, two factors in our strong profit performance. Vistar's underlying momentum was further boosted by the recovery in many of their channels, providing profit growth that exceeded our prior announced expectations. Finally, our convenience business remains robust with additional business wins in the food, foodservice and related products area. We have now owned Core-Mark for a little over a year, and the results are better than we had expected when we announced the transaction. Our consolidated results put us on track to exceed our original outlook for fiscal 2023 and to hit the three year outlook we provided at our Investor Day in June. As a reminder, our three year targets are for $62 million to $64 billion of revenue and $1.5 billion to $1.7 billion of adjusted EBITDA in fiscal 2025. Today, I will share details on our food service and convenience business units before turning it over to Patrick Hatcher, who will give color on our Vistar operations. Finally, Jim will provide an update on our financial position and outlook for the remainder of the full fiscal year. As you saw in our press release this morning, our first quarter results have allowed us to confidently raise our sales and adjusted EBITDA guidance. This confidence is supported by the momentum our business has achieved, our broad channel and product portfolio and the resilience of our customers and the consumers they serve. The backdrop for our business remains positive with the resumption of more normal consumer activity through the summer and into the early fall. The slight moderation in restaurant traffic was more than offset by our market share gains, a continued recovery across Vistar channels and steady growth in our convenience segment. We closely follow the macroeconomic conditions and various outlooks for calendar 2023. As we have highlighted, we feel very good about our positioning in the market which is reflected in our overall top and bottom line performance. We see our broad portfolio of away from home channels as a steady growth engine even in a more challenging economic climate. A few specific proof points for the quarter. PFG's foodservice segment continues to outpace the overall market, particularly in the important independent restaurant space. In the quarter, total independent restaurant cases grew 6.9%, while organic independent cases were up 4.6% year-over-year. We continue to see market share gains across key independent categories. Growth in independent restaurants has been driven by our strong performance in center of the plate proteins as well as our performance brands, which have remained at record levels. Strength in these areas are significant contributors to our margin and profit performance. In the fiscal first quarter, Performance Brands penetration achieved an all time high and represented over 50% of our independent sales dollars. For independent restaurants, we have focused on adding new accounts. As we discussed last quarter, penetration within accounts has slowed as higher inflation has impacted foot traffic. However, our ability to grow new accounts was a key factor in our organic case increase and bodes well for the future when foot traffic begins to reaccelerate. As we noted in this morning's press release, our growth in independent restaurants was offset by a decline in our chain restaurant business. We have shown caution concerning the chain business we take on and we have focused our efforts on accounts that fit well within our distribution network. Even with the case declines in our restaurant chain business, we continue to see improving profit contribution from this area of our business. Part of the outperformance is a result of a slow improvement in our foodservice supply chain. Recently, overall foodservice inbound fill rate hit close to 97%. Our supply chain still has room to improve. However, we remain optimistic that it continues to trend in the right direction. We also benefited from improvement in our operational trends driven by staffing improvements and reductions in temporary labor. As we have discussed over the past several quarters, efforts to reduce temporary labor are expected to drive better productivity and lower expense ratios. We are seeing this materialize with consistent week by week improvement and service excellence, lower levels of shrink and a decrease in warehouse over time. We believe there is still more improvement to come over the next several quarters, but it is rewarding to see the hard work of our foodservice associates translate into productivity gains. Our foodservice segment is performing at a high level with solid growth in independent restaurants, coupled with increased efficiency in our operations, the segment is producing higher margins and profit growth. Foodservice segment adjusted EBITDA margins improved 55 basis points over the prior year period. Turning to our convenience business. We remain extremely pleased with the progress Core-Mark has made as part of the PFG organization. In September, we passed the one year anniversary of the closing of the acquisition. Within that year, the team has made significant strides as we integrate the organization while continuing the consistent business momentum. During the quarter, we announced our convenience business would operate under the Core-Mark brand, demonstrating the collaborative effort of our entire [sea source] team. The combination of the two management teams has been a seamless transition attributed to the management of both companies. Hence, the results have remained impressive. Our non-nicotine portfolio grew sales at a high teens rate in the quarter, offsetting the low single digit decline in nicotine product sales. The mix shift to higher margin food and food service related product categories continues to drive both growth and adjusted EBITDA margin improvement in the segment. In addition, our cost synergy capture remains on schedule. We are excited about the prospects at Core-Mark and expect continued business wins to drive value from this transaction. I'd like to spend a moment discussing the inflation environment and how it has impacted our business. Overall product inflation in the fiscal first quarter was up 12.3% year-over-year, a sequential deceleration compared to the 13.6% increase in each of the prior two quarters. The deceleration in total cost inflation was driven by a sequential decline in the rate of growth in our foodservice segment, which saw inflation grow in the low teens compared to a high teen increase in the prior two quarters. This is still well above historical levels but a fairly sizable drop since the spring and early summer. The decline was driven by center of the plate proteins, such as meat, poultry and seafood which were close to flat on a year-over-year basis. Outside of these categories, inflation continues to run well into the double digits with notable increases in dairy, eggs, produce and disposable items. We believe inflation will continue to moderate in foodservice through the balance of the year. Inflation at Vistar in the convenience segment remains high and actually accelerated in the fiscal first quarter. We continue to see significant pricing actions across a range of categories, particularly candy and tobacco. At Vistar, inflation was in the mid teen level in the quarter and increased sequentially in each month of the quarter, up from a high single digit increase in the prior two quarters. In the convenience segment, inflation was also higher sequentially, though not as dramatic an increase as at Vistar, with convenience inflation ticking up just into the double digit range in the quarter and fairly steady across the three months of the quarter. Inflation in these two segments has produced larger than typical inventory gains in the quarter. As we noted last quarter, these type of gains are not atypical, particularly for CPG categories like candy and cigarettes. We continue to expect these gains to moderate through the balance of fiscal 2023. This is all factored into the updated guidance we provided this morning. To summarize, we are very pleased with our first quarter results, which put us on the right track to have another successful full fiscal year. We are getting top and bottom line contribution from all three operating segments and the backdrop should provide continued growth in the quarters ahead. Our team has done an excellent job keeping operating expenses in check with improvement in labor due to lower levels of overtime and temporary labor costs, which is helping offset higher wages. Product inflation is certainly helping our profit results but our underlying business and market share gains are supporting long term profit, and we are very much on track to achieve our 2025 vision. With that, I'll turn it over to Patrick, who will provide some highlights from Vistar.

Thank you, George, and good morning, everyone. This morning, I'll provide a brief overview of our performance at Vistar before turning it over to Jim for a review of our financials. Vistar posted a great quarter, helped by continued recovery in many of the channels that were particularly hit hard during the pandemic. Dollar sales grew in every channel for Vistar, vending, which remains Vistar's largest channel saw double digit case volume increases year-over-year, producing strong sales growth. Cases were also up nicely in office coffee services and theater despite an extended return to the workplace and lighter movie content in the fall period. We'd expect both theater and office coffee services to improve further in the second and third quarters as more workers return to the office and the movie release calendar picks back up around the holiday season. While smaller on a percent contribution basis, office supply, hospitality, campus and concessions also grew case volume in the quarter, boosting sales growth on a one and two year basis. All in, Vistar's net sales passed the $1 billion mark for the second consecutive quarter, growing nearly 29% compared to the prior year period. While inbound fill rates continue to be a challenge for Vistar, we have seen some signs of improvement in supplier fill and this improvement continued through the end of the fiscal quarter. The Vistar organization successfully kept operating expenses in check, providing leverage on our sales growth and resulting in solid profit growth year-over-year. In particular, Vistar saw the benefit from lower overtime and contract labor costs compared to last year. As a result, segment adjusted EBITDA for the fiscal first quarter was up 146% compared to the prior year. I am extremely pleased with how the Vistar organization has stepped up to the challenges the past several years have brought and believe the progress made over the past several months has put us in a better position than we were prior to the pandemic. The team in place at Vistar is strong. I look forward to watching the organization continue to succeed as I move into the CFO role in the coming months. I will now turn it over to Jim to review our financial results and outlook in more detail. Jim?

Thank you, Patrick, and good morning, everyone. As George mentioned earlier, we began fiscal 2023 the same way we finished fiscal 2022, in a position of strength, outperforming our outlook on both the top and the bottom line underpinned by a solid financial position. Our main strategic priorities remain the same; sustained profitable sales growth, adjusted EBITDA margin expansion and lower leverage. Our results in the first three months of fiscal 2023 demonstrate that we are very much on track with all three initiatives. We have continued to support the growth of our business through targeted investments in capital projects and strategic M&A. We've made significant progress on both fronts, rebuilding working capital to reflect the acceleration in demand, increase our warehouse capacity to reflect our future growth potential and at the same time, we've successfully integrated Reinhart, and we're well on our way to a full integration of Core-Mark. These actions have been important pillars in achieving our first two objectives; profitable sales growth and adjusted EBITDA margin expansion. I'd like to spend some time discussing our third priority, reducing leverage. It has been our focus to bring our leverage down to a range of 2.5 times to 3.5 times adjusted EBITDA. I'm very pleased to say that as of the end of the fiscal first quarter, PFG’s leverage was within our target range, closing the quarter at approximately 3. 4 times our trailing 12 month adjusted EBITDA. This was achieved by the strong adjusted EBITDA growth of our business plus targeted reduction in our outstanding debt balance financed by our cash flow. In the fiscal first quarter, we generated about $316 million of cash flow from operations. After accounting for $40 million of capital investment, PFG generated more than $275 million of free cash flow. This strong free cash flow generation allowed us to pay down about $246 million of ABL borrowings. At the end of the quarter, we held $4.1 billion of debt including capital lease obligations. About 77% of our debt is at a fixed interest rate, including interest rate swaps on a portion of our ABL borrowings. Our weighted average cost of debt during the quarter was 4.7%. Our ABL has attractive financing terms. And we believe that even in rising interest rate environments, our cost of borrowing is very attractive and manageable with our cash flow profile. With that, let's quickly review some highlights from our fiscal first quarter. PFG total company net sales increased 42% in the first quarter to $14.7 billion, which was above the top end of our guidance range. Total case volume increased 16.3% in the first quarter, including the contribution from acquisitions. Total independent cases were up 6.9% in the first fiscal quarter while organic independent cases increased 4.6%. Outperformance in independent case volume continues to reflect market share gains and new business wins in that important high margin business. Total PFG gross profit increased 37.9% compared to the prior year quarter, including the addition of the Core-Mark business and the independent case growth, which I just mentioned. Core-Mark contributed about $310 million in gross profit during the first fiscal quarter. As George mentioned earlier, we did experience deceleration in overall cost inflation as we move through the quarter. Though inflation remains elevated on a year-over-year basis. Total company cost inflation was up about 12.3% as a deceleration in foodservice inflation was somewhat offset by higher levels of inflation at Vistar and convenience. While inflation has remained elevated, we still expect lower levels of inflation through the remainder of fiscal 2023, which we have included in our guidance assumptions. We continue to manage higher levels of cost inflation through our scale, which improves our buying power with suppliers. We also leveraged our product offerings with performance brands portfolio, which offers value to our customers. These initiatives drive the positive mix shift and margin improvement reflected in our results, and we believe will remain a tailwind for the balance of the fiscal year. Gross profit per case was up about $1.04 in the first quarter compared to the prior year period. In the first quarter, PFG reported net income of $95.7 million, an increase of $91 million over the prior year. Adjusted EBITDA increased 93.1% to $354.7 million. As you may have noticed in this morning's press release, our segment reporting now shows adjusted EBITDA results for each of our operating segments. We believe that this disclosure gives further insight into our underlying business results. Diluted earnings per share was $0.62 in the first quarter, and adjusted diluted earnings per share was $1.08. As you saw in our earnings release, the strong start to fiscal 2023 has allowed us to confidently raise our guidance for the fiscal second quarter as well as the full fiscal year. In the fiscal second quarter of 2023, we now anticipate $13.6 billion to $13.9 billion in net sales, which is an increase from our prior range of $13.5 billion to $13.8 billion. We now look for adjusted EBITDA in a range of $260 million to $280 million, a $15 million increase from our prior expectations for $245 million to $265 million of adjusted EBITDA. For the full year, we now anticipate net sales in a range of $57 million to $59 billion, a $1 billion increase from our prior $56 billion to $58 billion range. Adjusted EBITDA is now anticipated to be in a range of $1.23 billion to $1.33 billion, up from our prior $1.15 billion to $1.25 billion expectation. As George mentioned in his remarks, this keeps us on track to achieve the three year 2025 targets we set at our June Investor Day. Before closing, I want to discuss a few items impacting the quarterly cadence and our outlook for the balance of the fiscal year. As we have discussed on the past few earnings calls, we've been benefiting from gains on inventory sold through at a higher price due to the supplier led price increases. This dynamic has been particularly impactful in the cigarette and candy categories, two of the large areas of business for Vistar and convenience. These gains occur annually on a fairly regular basis. However, the recent pace of inflation and frequency of price increases from candy and tobacco manufacturers has produced higher than normal gains. Inventory gains began to accelerate in the fiscal third quarter of last year and stepped up in both the fourth quarter and again in the first quarter. In fact, the higher inventory gains in the most recent quarter led to a portion, though not the majority, of the profit beat compared to our adjusted EBITDA guidance. The expectation underpinning our current guidance is for decelerating inflation over the next three quarters in each of our segments. Naturally, this means lower inventory gains in each subsequent quarter. Our outlook also factors in the strong inflation driven sales and profit gains in the back half of last year, with a particularly high comparison in the fiscal fourth quarter. Given this dynamic, we are increasing our outlook for the fiscal second quarter and we will maintain our outlook for the back half of the year. In summary, we are in an excellent position, which is reflected in our solid first quarter results and strong financial outlook for the remainder of the year. We are making great progress on our three focus areas; sustained profitable sales growth, EBITDA margin expansion and lower leverage. We also generated significant operating and free cash flow during the quarter through a combination of profit gains and working capital management. We continue to make quick progress on our integration of Core-Mark while adding profitable new accounts. Our organization is executing our strategy and we are well positioned to continue to create value for our shareholders 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.

[Operator Instructions] We'll take our first question from Edward Kelly from Wells Fargo.

George, your independent case volume was up, total case volume flat. Can you just talk about what you're seeing on the demand front? I think you mentioned some elasticity on price. You also exited some chain volume and I don't know if you can quantify that. But just kind of curious as to how you could sort of like unpack that. And then comparisons do kind of ease going forward and I know you are a -- you target case volume growth. So I'm just kind of curious as to how you're thinking about this the rest of the year.

Well, October would be, I guess, a little bit of a reflection of kind of where we're headed with things. We have seen slightly better independent case growth. Our national account business has really varied. We still have some chains that are doing real well. We have some not doing so well. We really only did one what I would call exit of business. We did impose a little higher pricing on a couple of customers that left us because of that. But I think for us, as our operations get better and we made a significant improvement in Q1, that's continued into October, you'll see us a little bit more aggressive, but very targeted in that national account business. I would have to say that the industry is a little weaker as far as the restaurant business, I don't think that's a concern of ours. We're doing a good job of picking up new customers. I also think when you get into these pre-election periods, particularly one followed as closely as this, people tend to not go out as much. It's a little difficult for the chains to get their ads out there that they normally would, they're very expensive and a lot of competition for ads. So all in all, as we go into this deeper into Q2 when we look at the rest of the year, we actually feel quite confident.

And then just a follow-up on gross profit per case. Obviously, very strong performance, up both for $1. I don't know, Jim, if you could help unpack how much of that relates to the timing of the inflation benefit that does ease over time versus obviously all the good underlying performance that you've had. I'm just kind of curious as to how much of this you end up holding on to and how we should be thinking about modeling that going forward?

Ed, I think the best thing I could do to help is to point you to the guidance that we provided. And that factors in all our expectations around -- and assumptions around inflation going forward. We've held true to the continued belief and built in the assumption that inflation will begin to moderate, and we use that in developing our guidance algorithm. I think right now, that's probably all I want to share about margins. I guess the last thing I would say is, as we mentioned, we had some inventory holding gains, but the vast majority of all of our improvement was due to the underlying business performance, and couldn't be prouder of how the business performed across the last quarter.

And I'll give you a couple of other comments with it that I think are important to give. We've always been a company that grew gross margin through mix. That is more emphasized in this quarter than it's ever been. So within our Performance Foodservice, obviously, no growth in national accounts and continued growth in independent, but also record levels of brand penetration, and actually October was another record for us there. When you get to Vistar, during the period of time that we were depressed from sales from a COVID standpoint, more of our sales were in that what we call value area, kind of the dollar store type area, which is not as mature for us or as profitable. So we had a nice benefit from customer mix within Vistar. And then within Core-Mark, if you think about having mid to high teen growth ex tobacco, that's where the better margins are. Tobacco, obviously, very low margin, and we've had slight sales declines in tobacco. So we've had the benefit of mix all the way through, and that is a much bigger benefit from us than the gains that we've made on our inventory.

Our next question comes from John Heinbockel from Guggenheim Partners.

George, I know you guys are now in the mode of adding new accounts. So if you think about case growth, organic case growth going forward, what percent of that do you think will come from new accounts as opposed to wallet penetration? And when you look at those new accounts, where are they coming geographically cuisine type, is there any trend there?

No accounts right now are really all of our growth. Now we're continuing to increase our lines within the accounts, but that's not translating into increased penetration within the accounts because, obviously, they're not buying as many of the existing lines. So is that going to be that way going forward? I think that's hard to tell. It kind of depends on what happens in the marketplace. But for today, we're counting on new accounts to give us the growth that we need. As far as where those new accounts are coming from, I wouldn't say it's any certain geography or any certain type of customer. I mean we're continuing to do very well in pizza, we're doing -- continue to do very well in Hispanic. But it's pretty widespread as far as where we get the new accounts, particularly in the markets where we're broadline.

And then I mean, maybe as a follow-up to that, right? Maybe talk about from a Core-Mark standpoint, the same thing, right? Obviously, bringing on new accounts there on the independent side is pretty consistent. Where do you see new account growth with Core-Mark, right? Is that low single digit, mid single digit? And then what do you think the timing is on the lumpy accounts, right? I know there's opportunity over the next two or three years. Is any of that likely in the next 12 months or that's all out on the horizon?

Well, we have quite a funnel in that part of our business. Some of the sales will show up in Performance Foodservice, some will show up in Core-Mark. I don't think I'm, at this point, qualified to say when some of these will come in. We do have some business right now that we have no histories, that's part of the growth that we're getting in this nontobacco area. But we just feel confident that we're going to continue to be able to either solidify some accounts by getting further penetration in that nontobacco area or just continue to get new business. It is chunky. There is still a lot of independent accounts out there, and I think that we're getting better and better at that. We're getting more aggressive in that area. Hopefully, that will give us a little less of this lumpiness that comes with new business, but that's our growth vehicle in Core-Mark, just like it is in our other business.

Our next question comes from Brian Harbour from Morgan Stanley.

Maybe just a question on -- you commented on kind of overtime and use of contract labor. Is there any way to think about where you stand on the use of that currently versus kind of a normal period, and how much more that has to run?

We've normalized contract labor. I think the operations team across the nation has done a very good job of methodically and appropriately working that down across at least the last five quarters. They've done a really good job and we're at the point now where that's no longer a pain point, which means that we are spending more time working on reducing overtime and driving productivity and making sure that we take care of those great workers out there in our supply chain as we sure do need them.

And just on maybe the performance brands mix of sales, could you remind us kind of where that's been in the past? And obviously, you're doing record levels now, but how do you kind of continue to push that higher?

Well, we've marched from high 30s to just over 50%. We almost hit 51% in the month of October. As far as where we can go with that, we do have a few companies over 60%. Those are kind of legacy pizza companies where we do a much better job. So I'm not sure where that goes. I'm not trying to be evasive with it, but we really don't know. We're at a higher level than we expected at this time. And we've just seen tremendous performance on the legacy Reinhart companies as they've been able to get involved with the brands that they currently use and continue to use, and kind of putting in some of our performance brands in there with it. So we think that there's probably more upside in Rinehart than there is in performance. But we're comfortable with where we're at and slightly surprised that we got here as quickly as we did.

Next question comes from Mark Carden from UBS.

To start, just given some of the increased economic uncertainties, are you seeing any competitors becoming more aggressive on pricing. Does the temptation exist for them to invest a bit more if maybe not seeing the same kind of market share growth that you are, or are things remaining still pretty rational to date?

Our industry is very competitive, it always has been. I think that it's quite competitive in a rational area. I mean, we love being competitive, right? There's just so much more to just price and how people make their decisions in our industry. So we work as hard as we can work on those important areas to the customer that aren't just price. And we feel good now because we feel like we've got our operations back in order and we can pivot a little bit more towards growth. And we've been able to do really in the last probably four plus quarters, we've been really challenged operationally and we feel good now.

And then a follow-up on the convenience business. How much of an impact are fluctuating fuel prices having on demand? Are you seeing customers becoming any more or less sensitive given the current economic backdrop?

That's been interesting to watch. Typically, high fuel prices helped the non -- particularly non-tobacco sales because people come in more frequently because a lot of people aren't filling their tanks. They have a certain amount of money they're going to put in their tank and that frequency goes up. When the fuel was really high, we did see the opposite. People coming in less often being very frugal about their use of fuel. But we also saw the average ticket go up during that period of time. And now we're seeing, obviously, fuel prices come down some but we're continuing to see a little bit soft on the traffic, but a good ring when people come in the store, they're buying a little bit more than normal.

Next question comes from Jeffrey Bernstein from Barclays.

Two questions. The first one, just on your cash usage, obviously, beyond further penetrating existing accounts and adding new accounts, M&A is always a topic of interest. And I think you mentioned your leverage is now within the target range. So I'm just wondering if you can talk about your thoughts on uses of excess cash, maybe any change in your M&A strategy in terms of particular geographies or segments or food service versus convenience store. Just wondering what's out there in terms of potential opportunity for M&A with leverage at desired levels? And then I have one follow-up.

Well, we've really strengthened how we approach M&A. I think it's a difficult time for it. We now have a Senior VP of M&A and Strategy who's got a great background in that, and she's fairly new in that position and learning the business. But we have Patrick Hagerty who ran Vistar for years, actually was the one that really built that business. He is very involved in our M&A and we've got a lot in the works. I don't think I can tell you that we have things that are actionable right now. But M&A is always going to be an important part of what we do, and we want to be aggressive in really all of the channels and all of the businesses that we are in.

And then I just think about the broader restaurant industry. I know through COVID, there was talk about significant restaurant closures. Maybe it didn't end up being as severe as people feared, but maybe in the 10% range for the total restaurant industry. I think independents were higher than 10% and chains maybe below. But unit debt is hard to come by without your help. So I'm just wondering post-COVID, I think we had assumed there will be a bounce back. I'm just wondering if you could talk about the current environment, maybe total units versus pre-COVID. What's kind of changed in terms of the total restaurant industry with closures and then presumably some reopenings, or maybe not as many reopenings as we thought? Any thoughts would be great.

I think that we can only speak to that based on our customer base, and obviously, we don't have huge shares. I think part of why the same store sales are hard to come by right now is there are a lot of new restaurants opening. There are certainly many more open today than there was during the peak of COVID, so customers have more options and they're sprinkling their business around to more people than before. And I think that's healthy for the business. I wouldn't like to see us get where we have too many seats, which has happened to us before. I think for us, a really good sign as to how resilient this business is, is on the West Coast of Florida for us, where we have a significant amount of customers who did not open back up after that hurricane, yet we're doing more business than we did before then, which shows me that they're finding the place to get out to. The desire is still there. And even with less restaurants, we're doing more business. So it's a very resilient business and people like to eat out. And I think as long as we don't get ourselves in a position where there's just too many, I think it's going to be a very strong industry.

Our next question comes from Andrew Wolf from CL King.

And also, congratulations on the strength across segments. I wanted to ask about sort of looking at volume versus the increase in operating expenses by the segment is sort of from the outside kind of thinking of that maybe as a proxy for labor productivity. And it just appears as I kind of do those numbers that Vistar is having much better operating leverage or labor productivity than food service, but you guys are saying those kind of metrics are improving across the board. So I'm just asking you to kind of if you would contrast -- well, first of all, tell me if I'm kind of thinking the right way, or analyzing things right way versus your internal metrics. And it sort of implies that things are getting better, foodservice has a long way to go. And I'd like to get just your sort of sense of how quickly foodservice labor productivity can improve now that the labor market's normalizing?

We have a ways to go when it comes to productivity in our Performance Foodservice area, quite frankly, we have it in Vistar as well and to a greater extent in Core-Mark. That's one of the encouraging things for our future because we really feel like we will get that back to pre-COVID levels. We are not there yet. We also, in Vistar -- with a real surge in volume, Vistar was much more negatively impacted by COVID than the other areas. I think anytime you get that kind of influx in business, you're able to leverage it, but we still see potential within Vistar to be more efficient than we are today.

And I guess, do you have any sense of the cadence? Do you think it's improving at an accelerating rate, or it's too early to tell when labor productivity gets back to a pre-COVID or if it does?

Look, I think there's a couple of ways we can respond to that. First, to summarize, each division is improving across so many fronts, yet they haven't peaked by any means. Labor is one of the areas that continues to improve and is a very nice tailwind and helpful, but there's room for more improvement in labor, in our own brands and service levels, supply chain productivity and efficiencies. It is a very positive place and a great position of strength to come from and realize that the company is performing well, yet we have so many key metrics that we know we can improve on, and we're confident that we'll improve. Hopefully, that's helpful. I guess from a cadence standpoint, we believe we've bundled it up well and it's reflected in our guidance across the rest of this year and the fact that we feel confident in our long term outlook as well.

Next question comes from Lauren Silberman from Credit Suisse.

So I wanted to ask on performance brand cases the growth as well as record penetration. What's your sense of what's driving the growth, are you seeing any shift in seeking out more value in fill rates, are you guys getting more aggressive on your end?

Well, I think we're always aggressive with our brands. I think the biggest reason is probably just the intense training that we put our people through. We are pretty fanatic about our brands and making sure that our salespeople understand the difference between what we have and maybe what others have, and that takes time and you have to do it. There's a lot of good branded product out there in our business, and our competitors are equally serious about their brand. And I think that any time things get a little bit soft, I think people get a little more price sensitive or price value sensitive, and that's probably helped us as well.

On the Vistar segment, the inflation accelerating in candy and tobacco. Do you expect these prices to hold? So better said, can we assume pricing is stickier in the CPG channel relative to what we might see in food service, understanding that the inventory gains…

As we look ahead, any possibility of deflation is really more in Performance Foodservice than it is anywhere else with maybe the possible exception of coffee. Coffee can be pretty volatile. What we have always seen in our other businesses outside of foodservices, people fight pretty hard to get their price increases. And once they get those, it's extraordinarily unusual to see them go back in pricing. They could skip an increase if things were to change and their input product goes down, but that's historically what we've seen. Now our inventory gains typically are what was in Jim's prepared remarks, it's -- the big ones are the CPG type 1s and those tend to come with fairly good regularity. We've just had a little bit more here of late.

And then just last one for me. The acquisition in foodservice this quarter, can you give us any more color on sort of the nature of the business that you acquired?

Would that be merchants?

Is that what, okay. So I thought there was something different…

No, we do not have anything since merchants.

Our next question comes from Kelly Bania from BMO Capital.

I guess, I was just curious and maybe I'll try asking again if you can quantify the inventory gains and the impact on Q1, how much that was in convenience or Vistar? Or maybe said another way, would the underlying EBITDA margins be kind of more in line with historical performance for those segments. I'm just trying to make sure we're thinking about modeling this for next year, or should we be down in profitability next year as we lap this? And also, I guess, same question for Q2. Is the guidance rate for Q2 really just reflecting just the inventory or some more underlying performance coming in better than expected?

So the guidance raise in Q2 is about underlying business performance continuing to improve, not related to continuing inventory gains. As far as Q1, we had a very good quarter. We had a good quarter on many different fronts. One of those fronts, and we categorized it, I guess, the majority of the improvement was in the underlying business, implying much less than the majority was in inventory holding gains. I would want you to know that the business is doing really well, did do really well in Q1 and our profitability improved well before recognition of inventory holding gains.

And then maybe I missed this, but can you just help me understand a little bit more the case volume trends within convenience and Vistar, and maybe the story is tobacco and non-tobacco within convenience. But just where are we and how do you expect those to progress as we move forward?

When it comes to the tobacco business, I can't say that I can speak to that. It's not something that I really spend any time on or follow closely, and I don't know that anyone knows. But there's been a gradual reduction for several years and that will probably continue. But like I say, I'm not a no expert. When it comes to the rest of the convenience store, I think we're going to continue to do well. We have seen actually acceleration from the first quarter and we hope that, that continues. It's been very good. You also asked with Vistar. Vistar, a lot of it is those channels coming back and us coming back in a better position within those channels than we were pre-COVID, that would be the way that I would look at it.

Our next question comes from Nicole Miller from Piper Sandler.

Can you dig a little bit more into the convenience store commentary. On the one hand, it sounds like it might be the piece of the business growing the fastest. But I also wanted to understand you could have less traffic and more spend and do you net out to more total sales, if I'm understanding that properly. And a little bit about the center aisle versus the perimeter and the opportunities there in sales and margins.

When we have the customer, we tend to have the center aisle of the non-DSD items, and it's just part of a program that we typically have with them. It's the outside of the store where Core-Mark has not been really robust with the amount of inventory available in food service product. And as we either get more product to satisfy that customer's needs into the Core-Mark facility or also deliver it out of Performance Foodservice, that's where greater growth is available for us. The bulk of the growth that we'll get inside the store will be new accounts or I’d say center aisle.

Can you -- a example, like products that you would want that would kind of unlock this whole thing? And if it's a lack of a product availability, that's a domino effect, I imagine of something else. And I could be curious and say maybe that's labor, I don't know. But like where does that issue really fit, if that makes sense?

Well, the problem that we would have out of the Core-Mark facility is just sheer physical capacity and that the ability to have the size freezer basically that is needed. And then you have to have the right inbound volumes and we don't always have that, so many of these customers are just better suited to be delivered by Performance Foodservice.

And then on the balance sheet, I'm going to straight up admit it's not a fair question, but the market loves, I mean everything. And obviously, today is a great reflection. But if I take today out of the equation, stocks, companies with leverage weren't as favored of late. And I would not imply that you would do something that doesn't work fundamentally for the company for the stock. However, it's tied to interest rates and that environment is entirely different. So while you're ultimately understandably very comfortable with your leverage as it stands today, when you take into account where interest rates are and going, why not make that even more of an opportunity even less debt, essentially?

Our intention as of today is to continue to pay down debt and continue to work down leverage, as I assume you would expect us to do. And I think your explanation makes good sense, and I would tend to agree with it.

Our next question comes from Joshua Long from Stephens Inc.

I wanted to circle back on the labor side. It's encouraging to hear that the contract labor has gotten under wraps. So it sounds like labor sourcing is improving as well. If that's true, any sort of commentary around just what's been able to -- how you've been able to address the improved sourcing? And then as we shift over to then thinking about the retention piece, I imagine that's an opportunity for you as well. Any sort of initiatives or thoughts you could share there in terms of how you plan to address the retention piece?

Look, I want to be thoughtful here in the response. We are improving on the labor front across all aspects. We have room to improve, considerable room. So I want to make that clear first. I actually see that as good healthy opportunity across the mid to long term. We're doing things that work for us as far as improving our ability to source workers and improving our ability to retain workers. I think the best way I would describe it is they matter to us. They're important to us, and we want to take care of our supply chain associates for sure. But as far as giving specific details around how we we are attacking it, I think some of those things are a differentiator, and I'm not going to explain them in detail right now. But surely appreciate the question.

But when we think about the cross selling opportunity that we've talked about in the past, could we readdress that or just revisit that in terms of where you're at versus expectations or what the longer term opportunity is, as we think about now having about Core-Mark here with over the last year or so. Just how that's unfolded and if there's additional opportunities from a cross selling perspective?

I do feel there's additional opportunities. I couldn't tell you that we have this totally figured out at this point. But the two companies are working very close together, particularly on the foodservice part of the business. Also, we've got some good activity going on between the Core-Mark area and the Vistar area, particularly now that Scott McPherson oversees both of those businesses, and we just feel we have a bright future. I got a lot of work to do, but we've got a bright future with it. But as far as any details around what we're doing today, we're still working.

Looking forward to continued updates there. It seems like the supply chain improvement or the base of the backdrop for continuing improvements in supply chain, and I think you mentioned some improving inbound fill rates. Is that right? Is there still room there? Should we expect that to continue to improve steadily over time? Just any sort of context there as we think about the broader supply chain environment and within the context of what remains relatively challenging operations overall.

We've seen good improvement inbound, particularly in Performance Foodservice. We haven't seen as much gains in our suppliers within Vistar and Core-Mark. Our expectation is that we, as a company, should get our service levels and our productivity back to pre-COVID and our suppliers should get their service levels and their fill rates back to pre-COVID levels. So we're not there yet, they're not there yet and I think that both group's people will get there.

We'll take our next question from Peter Saleh from BTIG.

Thanks, and congrats on a great quarter. I just wanted to come back to the conversation around the Italian pizza segment given your exposure. And there's been some concern that there's pizza fatigue coming out of COVID, given the surge we saw over the past couple of years. Just trying to understand maybe you can give us a little bit of color on what you're seeing in that category in terms of -- are most of the sales coming from just straight up price increases, are you seeing volume improvements among independents? Just trying to understand what you guys are seeing in that category.

We're seeing volume improvements. We've seen a little bit of a tick up so far in this quarter. It is not by any means what I would call real robust. I mean nothing compared to what it was during the kind of the peak periods of COVID when there weren't as many options for the customer. I would say that what's driving our business there today is new accounts, that's kind of our lifeblood there. The same store sales growth is just not there currently. And you can see that in the big chains as well. They're struggling through comparisons with those numbers from last year. But our business within that segment is growing. Our shares are growing at the best rates that we've seen as far as the type of reporting that we get. So we're pleased with our group of people there and we're certainly pleased with our brands and the product offering that we have.

And then just on the labor side, coming back to that conversation, good to hear that you're seeing improvements on labor. And I understand that you're not exactly where you want to be. But Jim, I think you mentioned reducing overtime as an area of opportunity. Is there any way to quantify where you are on overtime usage versus where you've been and where you think that could go?

We haven't given any specific numbers around it. I would just say that over time it’s higher than we would like it to be. But sure do appreciate the fact that folks are working really hard out there to get the job done by the end of the day. So we know that over time we’ll continue to go down as productivity continues to improve.

Our next question comes from Carla Casella from JPMorgan.

Most of my questions have already been answered. But can you just give us an update, and I may have missed it, if you said at the beginning, I missed some of the beginning, the percentage of exposure you have to tobacco now pro forma that we have Core-Mark in there for a full year tobacco sales?

Yes, our tobacco sales are running slightly behind last year, very, very low single digit declines. So obviously, it's a lesser percentage of our total business. But if you look at Core-Mark specifically, mid to high teen growth in non-tobacco, slight decline in tobacco. So the mix is swinging at a pretty good rate right now more towards the non-tobacco.

And I'd refer you to the K. You can find more information…

You can get that in the K, that's right.

Okay, you'll break out what percentage of total sales tobacco is in the K?

That's correct.

[Operator Instructions] We'll take our next question from Jake Bartlett from Truist Securities.

First, I wanted to ask about wage inflation, kind of wage rates and how they've been trending. One thing we've heard from restaurants that have reported this earnings season is an expectation for very strong wage inflation, mid single digits through 2023. So I'm wondering if you're expecting the same, expecting fairly tight labor market and for your cost to be going up on wages into the next year? And then I have a follow-up.

Well, if you look at where we've gone with wages. So during the COVID period of time, we tried as best we could to make sure that we kept our people, we didn't want a lot of turnover. And we did a good bit of it through onetime nonrecurring sign-on bonus and stay bonuses and things like that. But any market where our study showed that we were paying at under the market rate, we brought the market rate up, and didn't hesitate really to do that. We didn't have to do it in that many areas. We were fairly effective with how we were paying and that's how we'll be in the future, too. I mean, we're going to make sure that we're at market in every market, not necessarily the person that's driving the market up, but we want to make sure that we get good people, we retain the people and it's not easy. And people don't make decisions solely about how they're compensated, but we understand the importance of it and we make sure that we're on top of it.

And then my other question was on product inflation in the foodservice business. I think you've talked about it decreasing from current levels. But if you can be any any more specific, it would be helpful, what you expect in fiscal '23? And as I look at it, we think there's probably -- there's more risk of deflation in the center of the plate items. My impression, I mean I'm just hoping you can confirm or correct me if I'm wrong, but my impression is that proteins and some of those some of the plate items are priced on a dollar per case basis. So that actually -- if there is deflation in those items, it wouldn't impact your kind of gross profit per case. So maybe if you could just confirm that. I'm trying to think of how deflation in that part of the business would impact your gross profit.

I'll take the first part of the question. George will certainly address the second part. As far as how we're looking for inflation to move throughout the rest of the year. No, we haven't provided additional detail. The color we provided is based on where it is today, we expect it to methodically moderate and move down, but we haven't provided any more information than that. I do think that if I provided much more detail than I have, it would imply that I know more than I do and can predict inflation. I think that's a very difficult thing to do right now.

What I would add to that is that your comment around gross profit per case or gross profit per pound is very accurate, that's how we price those center of the plate items. We've tried as best we could to predict inflation. We're probably not any better than anyone else. We did do some very targeted purchasing ahead of price increases without having any real significant increase in our actual amount of inventory, and we were very effective there. And I think the important thing is that -- to recognize is that our inventory gains come from sequential inflation. We actually, in our Performance Foodservice business, last quarter experienced some sequential deflation. We continue to have the inflation in our other two businesses, particularly late in the quarter, we saw some sequential deflation. So I think that what we see, and we're no experts, from what we see the inflation is starting to moderate and go the other way when it comes to center plate.

It appears that we have no more questions at this time. I will now turn the program back over to Bill Marshall for any additional or closing remarks.

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