Performance Food Group (PFGC) Earnings Transcript

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DATE

Wednesday, February 4, 2026 at 9 a.m. ET

Call participants

• Chief Executive Officer — Scott McPherson
• Chief Financial Officer — Patrick Hatcher
• Executive Chair of the Board — George Holm
• Investor Relations — Bill Marshall

Takeaways

• Total Net Sales -- Increased 5.2% during the period, with growth in all three operating segments and particular strength in foodservice and convenience.
• Company Case Volume -- Rose by 3.4%, led by 5.3% organic independent restaurant case growth and 6.3% organic case gain in the convenience segment.
• Foodservice Segment Organic Independent Case Growth -- Achieved 5.3%, driven by 5.8% independent account growth; broad-based share gains reported in chicken, burger, barbecue, and seafood restaurant categories.
• Convenience Segment Net Sales -- Grew 6.1%, attributed to onboarding over 500 Love’s locations in September and 600 Racetrack stores in December, along with market share gains.
• Convenience Segment Adjusted EBITDA -- Increased 13.4%, reflecting strong cost discipline, operational efficiency, and incremental profit from new accounts.
• Specialty Segment EBITDA Margin -- Expanded by 40 basis points, with nearly 7% adjusted EBITDA growth; sales were negatively impacted by a theater channel decline of over 30%, equal to a $50 million drag.
• Gross Profit -- Rose 7.6%, with gross profit per case up $0.20 from the prior year’s period.
• Net Income -- Reported at $61.7 million, up 45.5% year over year.
• Adjusted EBITDA -- Up 6.7% to $451 million, with contributions from all operating segments.
• Diluted EPS -- Stated at $0.39; adjusted diluted EPS held flat at $0.98 due to increased interest expense and a higher effective tax rate of 28.8%, up from 25.2% last year.
• Operating Cash Flow -- Reached $456 million for the first half, $77 million higher than the comparable prior-year period.
• Capital Expenditures -- Totaled $192 million over six months, with full-year CapEx expected at 70 basis points of net revenue; focused on infrastructure maintenance and high-return projects.
• Free Cash Flow -- Totaled $264 million, an increase of nearly $89 million year over year.
• Company-wide Sales Force -- Expanded by nearly 6%, with hiring tailored at the local level to support volume and share growth.
• Foodservice Segment EBITDA Drag -- Management identified higher integration costs at Cheney Brothers and cheese/poultry deflation as “two meaningful EBITDA hurdles.”
• Cost Inflation -- Total company inflation was 4.5%; foodservice experienced 1.8% (with cheese and poultry deflation offset by beef inflation), specialty saw 5.4%, and convenience had 7.4% due to tobacco and candy.
• Full-Year Sales Guidance -- Set at $67.25 billion to $68.25 billion for 2026; adjusted EBITDA guidance updated to a range of $1.875 billion to $1.975 billion.
• Three-Year Plan Targets -- Management reaffirmed sales outlook of $73 billion to $75 billion and adjusted EBITDA of $2.3 billion to $2.5 billion by fiscal 2028.
• M&A Pipeline -- Remains “robust,” with Cheney Brothers synergy realization projected for late year two through year three; no changes to approach or prioritization described.

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Risks

• Elevated integration and infrastructure investment costs at Cheney Brothers are running “a little bit higher than we anticipated” and are expected to persist into the next quarter.
• Foodservice margins were “impacted” by cheese and poultry deflation, as the company over-indexes to those commodities.
• Specialty segment sales declined due to theaters being “down over 30%,” resulting in a $50 million headwind that will “persist” into the next quarter.
• Higher effective tax rate of 28.8% (vs. 25.2% last year) due to decreased stock-based compensation deductibility and increased foreign taxes.

Summary

Performance Food Group Company (NYSE:PFGC) delivered net sales and profit growth across all segments despite macro pressures, with notable gains in convenience and proprietary foodservice channels. The onboarding of large new accounts boosted convenience segment results and contributed strongly to EBITDA. Management cited two ongoing EBITDA pressures—Cheney Brothers integration costs and deflation in key protein categories—both of which may influence near-term margin dynamics. Updated full-year guidance reflects these challenges but leadership reaffirmed targets through fiscal 2028, with expectations of meaningful synergy contributions from recent acquisitions. Elevated capital expenditures and a higher effective tax rate also played a role in shaping this quarter’s financial profile.

• CEO McPherson said, “We still believe a rate of hiring at or above 6% makes sense for the long-term support of our growth rate, but expect this number to fluctuate in any given period.”
• “The adjustments in our full-year projections are largely a flow-through of the more difficult second-quarter period,” as stated by management regarding current guidance levels.
• Patrick Hatcher remarked, “We did not repurchase any shares under our share repurchase program in the quarter. We will be opportunistic around share repurchase, but our priority remains debt reduction.”
• Management emphasized that most Cheney Brothers synergies are not expected to “start flowing through the income statement late in year two through year three after the close of the acquisition.”
• Convenience segment benefited from a “mid-teen non-combustible nicotine product sales growth,” supporting a favorable margin mix shift.

Industry glossary

• Case Growth: The percentage increase in volume of cases (packages/units shipped) delivered to customers compared to a prior period, a key sales metric in foodservice distribution.
• Adjusted EBITDA: Earnings before interest, taxes, depreciation, amortization, and other company-specific adjustments, used for measuring operational performance.
• Non-combustible Nicotine Products: Tobacco or nicotine offerings such as oral nicotine pouches and e-cigarettes that do not require burning, featured as a higher-margin convenience category.

Full Conference Call Transcript

Scott McPherson: Thanks, Bill. Good morning, everyone, and thank you for joining our call today. Before jumping into our second quarter results, I would like to recognize George Holm. We announced in December after nearly 25 years with Performance Food Group Company, George has retired from his role as CEO. Over his career, George built an impeccable reputation as an industry leader, a visionary, and an agent of growth. Since Performance Food Group Company's IPO in '2, sales have more than quadrupled to over $60 billion, and the market cap of Performance Food Group Company has increased sevenfold. Much of which can be attributed to the vision and influence George has had on the company.

More importantly, because of George's stewardship, Performance Food Group Company is defined by more than just financial results. It is a place where people want to work, customers and suppliers want to do business, and a preferred partner for strategic M&A. There's a reason that Performance Food Group Company is often the first and sometimes only call from prospective acquisition opportunities. Many of you have had the opportunity to meet with George and experience his knowledge and insight firsthand. On behalf of our entire organization, I would like to share my heartfelt thanks to George for everything he has done for the many thousands of people who have crossed his path.

I'm also thrilled that George will continue to play an important role for Performance Food Group Company. As executive chair of our board, he will be heavily involved in the pursuit of strategic M&A opportunities, maintain his connection to key customers, and be active in Performance Food Group Company's overarching strategy. Following an industry icon like George comes with great responsibility, and I'm excited to take the helm and lead Performance Food Group Company through our next chapter. George and I have worked together closely for the past four years, developed a powerful friendship, and collaborated on the vision for Performance Food Group Company.

As I look ahead, I'm excited to lead this organization, and I'm extremely confident in our ability to continue to drive growth and EBITDA performance by executing on our strategic priorities. In May, we outlined our three-year strategic vision, which the company and I are deeply committed to delivering. More specifically, this is a roadmap grounded by a balance of continued revenue growth, market share gains, gross margin enhancement initiatives, and improving operating leverage. The organization is off to a solid start in achieving our three-year plan and has strategies in place to give us a high level of confidence we will deliver. Let's now turn to our results for the second quarter of our fiscal 2026.

Despite a difficult macro environment, I'm proud of our organization's ability to overcome the challenges in the final months of the calendar year. The quarter saw declining foot traffic, the impact of the government shutdown, and softer sales per location across our segments. Despite the challenging backdrop, our company was able to post solid revenue and profit performance within our previously stated guidance range. Breaking it down by segment, let's begin with food service. Our organization delivered 5.3% organic independent case growth driven by a 5.8% independent account growth. During the quarter, we gained share across independent, regional, and national business largely consistent with our gains in prior quarters.

Share gains were broad-based across a range of concepts with particular strength in chicken, burger, barbecue, and seafood restaurants. To elaborate further, after a strong start to October, volume trends moderated soon after the government shutdown took effect. We did see some recovery once the shutdown was lifted, and we finished the calendar year with case growth in December roughly in line with the November result. According to Black Box data, industry-wide foot traffic decelerated through the quarter with December traffic down 3.5%. Our chain restaurant business followed a similar glide path reflecting consistent industry pressures.

Our total chain restaurant volume grew by low single digits year over year, as new business we've onboarded over the past several quarters offset the softer traffic environment. We attribute our consistent market share outperformance in part to our efforts behind growing, training, and supporting the best sales force in the food service industry. Our efforts in this area are proven out in the independent restaurant space. We continued to hire new associates during the period ending December with nearly 6% more salespeople than we had at the end of calendar 2024. As we have discussed on past calls, we do not have a corporate-wide hiring mandate nor do we require artificial hiring goals.

Instead, we emphasize the importance of expanding our sales force as a key driver of volume and market share growth while empowering our local operating companies to hire according to their specific needs. We still believe a rate of hiring at or above 6% makes sense for the long-term support of our growth rate, but expect this number to fluctuate in any given period. I want to take a moment to discuss the integration of Channing Brothers. As we discussed last quarter, we are pleased with the work being done at Cheney and expect this company to be a significant contributor to Performance Food Group Company's revenue and profit growth long into the future.

That said, we have been very consistent in our messaging around synergy timing when we expect the financial performance of Cheney to accelerate. When we made the acquisition, Cheney was making meaningful investments in its infrastructure to support growth. More specifically, the addition of a new 350,000 square foot facility in Florence, South Carolina, and a new 42,000 square foot facility in Saint Cloud, Florida, to expand its manufacturing capabilities. These investments, along with other integration costs, have had a short-term impact on Cheney's performance and our overall P&L.

Despite this activity, Cheney continues to grow independent cases at a rate consistent with the rest of our food service operating companies, gain share in its distribution markets, and provide its customer base with great service. To close out my comments on Cheney, I want to remind you that we anticipate the majority of the synergies to start flowing through the income statement late in year two through year three after the close of the acquisition. Profit performance for Cheney should begin accelerating accordingly. All in all, our food service segment had a solid second quarter growing volume through market share gains, new business wins, and expansion of our private brand portfolio.

We faced two meaningful EBITDA hurdles in the quarter that are likely to persist in the Q with my earlier comments on Cheney and the impact of cheese and poultry deflation. Despite the challenges, we remain confident in our strategy and expect our results to accelerate as we move through our fourth quarter, setting us up for a strong fiscal 2027. Turning to the convenience segment, on our prior earnings calls, we disclosed the addition of sizable new business wins for Core Mark. In the final weeks of September, we successfully onboarded over 500 Love stores contributing nicely to our second quarter results.

Also joining the Core Mark fold in December, were over 600 Racetrack locations, which we successfully integrated into our network, setting the segment up for a strong finish to fiscal 2026. Let's look at the convenience segment's performance during the second quarter. Net sales increased 6.1%, benefiting from market share gains and the onboarding of the new accounts just discussed. Our data shows a mid-single-digit industry decline in the key convenience categories as persistent inflation continues to weigh on the channel. Hallmark's positive volume results reflect the company's strong share gain outperformance and execution during the period.

Convenience segment sales were driven by low single-digit dollar growth from food, food service, and related products and mid-teen non-combustible nicotine product sales growth. Cigarette sales were flattish in the period. As a reminder, the mix shift away from cigarettes towards other nicotine categories and growth in food, food service, and related products causes a revenue headwind that is nicely accretive to our gross margin. This dynamic is a consistent secular tailwind for our profit growth, which we expect to gain momentum over time. Moving on to profit. In the second quarter, our convenience segment adjusted EBITDA increased 13.4% as a result of strong cost discipline and operating efficiency in addition to business from Loves and Racetrack.

Once again, our great team at Core Mark showed remarkable resilience and the ability to drive profit growth despite a challenging backdrop. Turning to specialty, trends in the second quarter were broadly similar to the first quarter. With a modest improvement in top-line trends coupled with nice productivity gains, produced segment adjusted EBITDA margin expansion. Sales growth was tempered by another difficult quarter in theater, which was down over 30%, representing an approximate $50 million drag on overall sales. Outside of theaters, specialty performed well, growing sales at a high single to low double-digit rate in the vending office coffee retail, campus, and travel channels.

Proactive management of operating expenses produced nearly 7% segment adjusted EBITDA growth in the quarter, representing 40 basis points of margin expansion. Closing out my remarks, it's certainly been a dynamic operating environment to take over as Performance Food Group Company's CEO. That said, I'm inspired by our organization's ability to consistently gain share across our business segments, operate safely while delivering exceptional customer service, and enhance our operating leverage. Driving sustained growth in EBITDA dollars and margins for our shareholders. Our diversification seeks to provide consistent performance in a range of economic scenarios, and our strong pipeline of new potential business should result in consistent long-term revenue and profit growth for Performance Food Group Company.

I'll now turn it over to Patrick, who will review our financial performance and outlook. Patrick?

Patrick Hatcher: Thank you, Scott, and good morning. Today, I will review our financial results from our second quarter, provide color on our financial position, and review our updated guidance for 2026. To echo Scott's comments, despite challenges in the quarter, we are very pleased with our progress through the first six months of 2026. Through December, we continued to make progress on our financial position, as our strong cash flow was used to invest behind our business to drive growth and reduce leverage. We believe that the investments we are making today will pay off nicely as we execute our strategy. We believe that the investments we are making today will pay off nicely as we execute our strategy.

In a moment, I will provide additional color on our financial position and capital allocation priorities. First, let's review our results for the second quarter. Performance Food Group Company's total net sales grew 5.2% in the second quarter, with growth in all three operating segments and particular strength in foodservice and convenience. Total company cases increased 3.4% during the quarter, highlighted by a 5.3% organic independent restaurant case growth and a 6.3% organic case gain in our convenience segment. As a reminder, having fully lapped the Cheney Brothers acquisition, as of the second week of the second quarter, Cheney was reported as part of our organic business for the vast majority of the period.

As Scott mentioned, in our convenience business, we are very pleased with the contribution from the addition of Loves, and are looking forward to the benefit of the racetrack business, which started onboarding late in the second quarter. These businesses are expected to deliver incremental sales and profit dollars over the next several quarters. Total company cost inflation was approximately 4.5% for the quarter, just slightly higher than what we experienced in the prior quarter. With that said, there were some items moving around within our cost basket. Foodservice inflation of 1.8% was below recent trends, with notable deflation in the cheese and poultry categories, somewhat offset by higher inflation in beef.

Specialty segment cost inflation was 5.4% year over year, about 140 basis points higher than the prior quarter, mainly the result of candy and hot drink price inflation. Convenience cost inflation increased 7.4%, again, slightly higher than the prior quarter due to inflation in tobacco and candy. As Scott mentioned, the inflation impact on the convenience segment sales growth is offset by the revenue mix shift away from cigarettes. The inflationary environment has been volatile over the past several years, but as a company, we have demonstrated our ability to handle a range of outcomes. We continue to model inflation rates remaining in the low single to mid-single-digit range throughout 2026.

Moving down the P&L, total company gross profit increased 7.6% in the second quarter, representing a gross profit per case increase of $0.20 as compared to the prior year's period. We are very pleased with our gross profit results, which shows our organization's resilience and long-term growth opportunity. In 2026, Performance Food Group Company reported net income of $61.7 million, a 45.5% increase year over year. Adjusted EBITDA increased 6.7% to $451 million, with all three operating segments contributing to our adjusted EBITDA growth. Diluted earnings per share in the fiscal second quarter was $0.39, while adjusted diluted earnings per share was $0.98, flat year over year.

Our EPS was impacted by several below-the-line items, including higher interest expense and an effective tax rate in the period. Our interest expense increased due to higher finance lease costs, offsetting lower debt balances and more favorable interest rates. Looking ahead, we anticipate a very modest sequential decline in the net interest expense. Our effective tax rate was 28.8% in the second quarter, an increase from 25.2% last year. The increase in our quarterly effective tax rate was due to a decrease in deductible items related to stock-based compensation and an increase in foreign taxes as a percentage of income, partially offset by an increase in tax credits.

We continue to expect our 2026 tax rate to be close to our historical average. Turning to our financial position and cash flow performance. In the first six months of 2026, Performance Food Group Company generated $456 million of operating cash flow, an increase of $77 million compared to the same period last year. We invested about $192 million in capital expenditures during the first six months. We continue to anticipate full-year 2026 CapEx to be approximately 70 basis points of net revenue, in line with our long-term target. Our investments in CapEx are primarily focused on maintaining and supporting growth within our infrastructure and high-return projects that we believe will support our long-term growth goals.

In 2026, we generated about $264 million of free cash flow, up nearly $89 million compared to last year. We did not repurchase any shares under our share repurchase program in the quarter. We will be opportunistic around share repurchase, but our priority remains debt reduction. The M&A pipeline remains robust, and we continue to evaluate strategic M&A. Performance Food Group Company has a history of successful acquisitions to drive growth and shareholder value, and we expect that to continue. At the same time, we will apply our typical high standards and robust due diligence to evaluate high-quality acquisition opportunities. Turning to our guidance. Today, we announced guidance for 2026 and updated our range for the full year.

For the third quarter, we expect net sales to be in the range of $16 to $16.3 billion and adjusted EBITDA between $390 million and $410 million. These ranges include continued deflation in cheese and poultry, the investment in our business, including onboarding of new capacity at Cheney, and continuation of a difficult backdrop for our specialty segment. We have also contemplated the impact of the recent winter storms in our outlook for the third quarter. For the full fiscal year, our sales target is now a range of 67.25% to $68.25 billion. We now expect full-year adjusted EBITDA in a range of 1.875 to $1.975 billion for 2026.

The adjustments in our full-year projections are largely a flow-through of the more difficult second-quarter period. Our results keep us on track to achieve the three-year projection we announced at Investor Day with sales in the range of $73 billion to $75 billion and adjusted EBITDA between 2.3 and $2.5 billion in fiscal 2028. To summarize, we are pleased with our progress despite a difficult operating environment in the second quarter. We are in a solid financial position, which supports our growth investments and capital return to our shareholders, and expect strong execution in the second half of the year. Thank you for your time today. We appreciate your interest in Performance Food Group Company.

And with that, Scott and I would be happy to take your questions.

Operator: Thank you. At this time, if you would like to ask a question, please press 1 on your keypad. To leave the queue, press 2. Once again, that is 1 to ask a question and 2 to remove yourself. We'll pause for just a moment to allow questions to queue. We'll take our first question from Mark Carden with UBS. Please go ahead.

Mark Carden: Great. Good morning. Thanks so much for taking the questions. To start, on organic independent case growth, you started the quarter with some solid momentum. Called out the shutdown. Any additional color you can add on performance by month? And then you also just called out some of the recent weather headwinds and impact to guidance. How is January lined up relative to your initial expectations? And do you still see a path to that 6% organic independent case growth for the full year?

Scott McPherson: Hi, Mark. This is Scott. Great questions. And as you talked about in Q2, we started the quarter in October, you know, fairly strong. That was the strongest period of the quarter. And then obviously, the shutdown certainly had an impact the longer it carried on. We saw our November and December months, you know, relatively equivalent. Definitely some choppiness week to week. And then as we moved into January, we saw, you know, really nice rebound, nice performance in January. And then, you know, certainly, as you know, you know, February has been, you know, materially impacted by weather. Last week, you know, really a good portion of the country was impacted.

And this week, you know, a little more isolated to the Eastern Half and the Southeast. But certainly had an impact and something we factored into guidance. When I look at the big picture, you know, we're very optimistic about the full year. And I think, you know, you called out the 6% target. That's always what we aspire to. That's that's kind of how our sales organization is geared is we want to be 6% or above. So we're certainly fighting to get there.

Mark Carden: Great. And then on the Salesforce front, have you guys seen much of an impact on either new hiring or retention in the back of some of the earlier uncertainty relating to US Foods discussions perhaps earlier in the quarter? And then just how did the pace of your Salesforce growth compare to recent quarters?

Scott McPherson: No. It's a great question. You know, really, what I look at when I think about Salesforce, force hiring and performance is really market share. And as I look at the Salesforce's market share performance, not just over the last couple of quarters, but over the last, you know, five or six quarters, we've been very consistent in our independent market share gains. You know, as far as actual headcount, we've been right at that 6% range for the first two quarters of this year. I'm totally comfortable at that level, you know, to see them continue to grow share, you know, to demonstrate through new account acquisition, we're at 5.8%. Net new account gains this quarter, same last quarter.

But at the end of the day, and I talked about this in my comments, you know, we are decentralized around that hiring. We certainly have opcos that are hiring in the double-digit range. And some that are, you know, probably below that 6% range. And we really leave that up to them. But, you know, what I use is my gauge is really anchoring back to market share. So I feel really good about where we're at right now and the availability of talent.

Mark Carden: Great. Thanks so much. Goodbye.

Operator: We'll hear next from Alex Slagle with Jefferies. Please go ahead.

Alex Slagle: Wondering if you could dissect the dynamics at play for the foodservice business. In the second quarter. It seemed like really strong independent growth and the independent mix, you know, sales jumped a lot, but the OpEx was elevated. You called out the chain investments and the cheese and poultry deflation. But maybe you could kind of talk a little bit more about how impactful that was and the cadence of the investments, behind Chaney and, you know, how that maybe differed from expectations or if that was sort of similar to what you expected.

Scott McPherson: Yeah. Let me just start off with Chaney. You know, want to take a step back and just, you know, that acquisition is something that we pursued for a long time. It's been a great acquisition to date. It's a great cultural fit. It fills in a geography that is really strategic for us. So we're really happy with the progress of the acquisition. As I called out in my remarks, we knew going in that we were going to make some material investments in their infrastructure. We have a brand new building that is just completed. We just started receiving product this week. It will start shipping probably over the next three to four weeks.

So, certainly, there are some costs related to that. We also opened a new manufacturing facility for them. So overall, I would say, you know, their costs are running a little bit higher than we anticipated. And the other thing that we're taking them through right now is, you know, they transitioning into being part of a public company is, you know, the integration cost to our benefits to our payroll, to our financial mapping. So, again, really happy with the acquisition. Certainly, you know, expenses are on a little bit higher than we anticipated. Then just, you know, you kind of asked about the overall cadence in food service.

You know, as you pointed out, really happy with our market share growth, both in independent and chain. You know, from a margin standpoint, you know, as we continue to grow that independent market share, that mix really helps our margin. So that's performed really well. And then, you know, I think from an OpEx standpoint in the core food service, you know, ex Cheney, you know, we have leverage, but I'd say, you know, definitely, there's some opportunity in leveraging OpEx in that area as well. But really, you know, pretty happy with how the core food service segment performed.

And then we talked about the deflation in those two couple categories did have an impact on margins for sure. We over-indexed in those two categories. So, really, you know, summing it all up, you know, Cheney and the deflation were really, you know, at the end of the day, really the miss in the quarter that would have gotten to the upper half of guidance.

Alex Slagle: Okay. And then I guess along the same lines, at least in terms of the improving mix of convenience, EBITDA margin opportunity, I wanted to ask about. I mean, it's expanded nicely, and some of that is the foodservice growth. And some other mixed items. But, I mean, the food service penetration actually is still seems to have a long way to go. Kinda curious what that could mean over time for the overall convenience EBITDA margins as we look out the few years, you know, and we continue to grow that portion of your business there.

Scott McPherson: Yeah. It's a great call out, Alex. There's a lot of things going on in the convenience segment that really, I think, help our margin profile over time. You certainly called out food service, and I agree with you. There's a long runway ahead. You know, we continue to grow food service in that high single-digit, low double-digit range. Both in our convenience segment and our food service segment into convenience. So, you know, kind of hitting that from two ends. So that's performing really well. When you look at the macro of convenience though, you know, one of the things that's, you know, I think really encouraging is what's happening in the non-combustible space.

Non-combustible nicotine, oral nicotine, and other forms of nicotine that aren't combustible are growing at a rapid pace. Those have a nicer margin profile than combustible cigarettes. So as we see that migration, there's a natural benefit to our margins in mix. So, you know, that's been a great progression, and I think that's gonna continue for a long time. So we feel really good about how we're set up and convenience from a margin standpoint.

Alex Slagle: Thanks.

Operator: We'll hear next from John Heinbockel with Guggenheim. Please go ahead.

John Heinbockel: Hey, guys. Scott, maybe you can touch on some of the self-help that you referenced back at the Investor Day, particularly strategic procurement. Where are we in that journey? You know? And then maybe as a related question for Patrick, just the impact of deflation on margin comes from where? I don't know if that's mix or, you know, inventory gains, or how does that flow through?

Scott McPherson: Yeah. So I'll take the first half of that and let Patrick tackle the second. So, John, we, you know, at Investor Day talked about procurement opportunities. And we've done a lot of work on that. And, you know, certainly in the clean room environment that we had over the last few months, you know, that allowed us to really dig into our own side of the procurement ledger. And really, at the end of the day, it gave us, you know, that much more confidence that, you know, we're gonna be able to get to that top end of the $100 to $125 million of procurement synergies over our three-year plan.

You know, the cadence of that, I'd say it's fairly, you know, linear. I think, you know, we're starting to capture some of that in the back half of this year. We'll definitely see capture in year two or in year three and get us to that end number. So we feel really confident about that.

Patrick Hatcher: Yeah. And, John, thanks for the question. I'll jump in here. Yeah. So where we're gonna see the impact from the deflation is largely gonna be in margin, but it could also be a little bit of inventory gains. I mean, you have to remember we have a very large basket of commodity goods that are constantly moving around. We called out cheese and poultry because our expectations for the quarter were higher than what we actually saw come through with the inflation. So that's the reason we called it out, and it's because we also over-indexed in those two commodities versus the rest of the basket.

John Heinbockel: Alright. Maybe follow-up for Scott. I know as part of The US food process, right, was some chain business. You know, that had sort of gotten tabled. Does that come back? When does that come back? And you know, how material is that?

Scott McPherson: Yeah. I think as George mentioned on prior earnings calls, you know, we had two or three folks in the pipeline, I'd say fairly material pieces of business that we felt like we had a really good shot at picking up. And as we said, you know, we felt like they were on the fence. Most of those, what they do in that situation is they will renew for the short term, and that's what happened with a couple of these. They signed one-year extensions on their agreements. You know, so we're certainly still in dialogue. But I would just step back and say, overall, in the food service space, we feel really good about our pipeline, both in chain.

In the convenience space, obviously, you know, they're performing exceptionally well from a market share standpoint. And I'd even step back and look at specialty and say, you know, we definitely called out the headwind in theater. That's been certainly a challenge. That challenge will really persist for us in the next quarter. That's when we lap at the end of this next or I guess this third quarter that we're in. We lap a pretty material loss in theater. But the rest of the segments are really performing pretty well. When I look at vending and retail, our e-commerce platform, you know, we're starting to see some momentum there.

So feel really good as we get into, you know, Q4, that you're gonna start to see some nice performance out of the specialty from a growth standpoint.

John Heinbockel: Thank you.

Operator: We'll move now to Jeffrey Bernstein with Barclays. Please go ahead.

Jeffrey Bernstein: Great. Thank you very much. My first question is just on M&A topic. Scott, you mentioned the pipeline is robust. Just wondering whether there's any change in Performance Food Group Company's specific interest. Seems like you're still working hard on the Chaney integration. Maybe costs are coming in a little higher than you thought. So I'm wondering if there's any change to the approach to that M&A, maybe with George stepping back, how we kind of prioritize that process? And then I had one follow-up.

Scott McPherson: Yeah. I would say overall, you know, really no change to our approach to M&A. I mean, George and I have collaborated on M&A for the last four years. We'll continue to collaborate moving forward on that. We certainly are looking at things in our pipeline, you know, to your point, you know, Cheney, I think has progressed really well. We're really excited about what that's gonna bring. And we called out early on that, you know, the synergies that we'll see in Cheney really come at the end of year two and year three. And that's really the way we approach M&A.

You know, we try not to make any drastic changes in those first couple years to really, you know, let them acclimate to the organization. We try and learn what we can from them as well. And we think that just makes for a much better long-term approach to M&A, and that's paid off with Reinhart. It's paid off with Core Mark, and it's certainly gonna pay off with Cheney.

Jeffrey Bernstein: Understood. And then just to follow-up on the independent organic case growth. I know you talked about always targeting kind of that 6% type range. Think the impression is going to be a little bit more of a fight to get there in the fiscal third quarter. So I'm wondering if you could share any of the current run rate or your expectation for that third quarter. And there was a passing mention on the weather. I was expecting to hear something more material. I was wondering whether you could quantify how much potentially that weather impact has had on sales, which were modestly below street expectations for the third quarter, but EBITDA, which was well below.

Just trying to gauge the primary driver of that EBITDA shortfall whether weather had a more outsized impact or whether it's primarily Cheney. Thank you.

Scott McPherson: Well, I'll talk to the cadence of the quarter. And, Patrick, you might want to fill in a couple of things here. We actually started January off really nicely. I would say it was a, you know, call it a rebound from where we were at in December, picked up nicely in January. And then certainly, you know, last week's weather was impactful. And, you know, I think going into this week, certainly having an impact as well. And that's certainly something that we took into consideration when we talked about our guide for the third quarter and the full year. Patrick, anything you want to add?

Patrick Hatcher: Yeah. Just a couple of comments on the guidance for Q3. You know, really what we have embedded in that guidance in the EBITDA is, you know, we do expect to see some continuation of the OpEx challenges that we've had to Cheney that we saw in Q2 will continue in Q3. We also are seeing that deflation impact from cheese and poultry continue into Q3. Scott touched on specialty. And then, obviously, the weather, we contemplate that. You know, we've had bad weather last year, two years ago during this quarter. It is our smaller quarter. It's very hard to, you know, obviously nail down weather, but we have recently experienced two weeks of, you know, impact from weather.

And as Scott mentioned, you know, we did see a nice uptick in independent cases as we entered this quarter. And we have the convenience with their new racetrack customer being for the full quarter. So we have some tailwinds as well. And that's really kind of how we built out the guidance for the quarter.

Jeffrey Bernstein: Thank you.

Operator: We'll turn next to Edward Kelly with Wells Fargo. Please go ahead.

Edward Kelly: Yeah. Hi. Good morning, everyone. I'm sure George is listening. If he is, you know, he will be missed, and so just wanted to say congratulations. I wanted to follow-up on the cost side, you know, for you. As it pertains to, you know, some of the higher than expected costs related to Cheney. I would think that the weather disruption probably adds, you know, some added cost too. I'm curious as we think about when the business normalizes and we look out, you know, into the next, you know, fiscal year, are there, you know, tailwinds associated with lapping this type of stuff?

You know, just kind of curious as to how sort of, like, one-time in nature, you know, some of the stuff is.

Scott McPherson: No. It's a great, great question, Ed. And, you know, certainly, as we talked about, Cheney, the, you know, the major investment in a facility, you know, that's a 350,000 square foot facility that, you know, we're staffing and have been staffing over the last couple of months. And, you know, that won't be fully online, you know, until probably two months from now. So you've definitely got some expense involved with that. And then, you know, as you called out, certainly, creates some expense challenges. You know, as I look at the three-year guidance, I think that's really where we contemplated, you know, what those tailwinds look like.

And certainly, you know, our synergies in Cheney we expect to come in years two and really into year three. And that's gonna be a nice contributor to our three-year guidance. And, you know, we feel really strong about delivering that.

Edward Kelly: Alright. And then just a follow-up for you and, you know, pertains to the three-year guide that you referenced. That, you know, there's been concern about this inflation. You mentioned it on the call today. I guess, first, you know, what's embedded in that three-year guide in terms of, like, an inflation outlook? If food service, you know, is just sort of, like, plotting along at one to 2%, is there any issue with hitting the three-year, you know, guidance if it's a low level of inflation? Just kind of curious as to how you contemplated all that in that outlook.

Patrick Hatcher: Yes. This is Patrick. And it's a great question. And as we think about the three-year guidance and inflation, you know, we embedded into our models what we thought would be a consistent number. And, you know, we've always said, you know, where we are right now is pretty good. We're calling out the deflation this quarter just because, as I've mentioned, our expectations were cheese and poultry specifically were gonna not be as deflationary as they are. So when we think about the three-year guidance, we have a lot of confidence in hitting that guidance. We're very much on track if you look at where we're projecting this full-year guidance to be.

And then as we enter next year, yeah, we have just a lot of confidence in executing our strategy. Continue to take market share, and then, you know, everything else that we've talked about.

Edward Kelly: Great. Thank you.

Operator: We'll move now to Kelly Ann Bania with BMO Capital Markets. Please go ahead.

Ben Wood: Hi, good morning. This is Ben Wood on behalf of Kelly Ann Bania. Thank you for taking our questions. Could you provide any more detail on the monthly cadence of volume trends you saw in convenience? Some of the industry data we look at suggest that sales trends really accelerated into December and through year-end. Is that consistent with what you guys saw? And if so, how are you thinking about the possibility of some of those key categories in convenience inflecting positive going forward?

Scott McPherson: No, it's a great question. As I look back over the full second quarter, those results were, you know, I would say fairly consistent with what we've seen historically, which was kind of low to mid-single-digit declines in a number of categories. To your point though, as we exited the second quarter in December and maybe even into January, I think one of the things that we've benefited from in the convenience segment is when you get fuel pricing that drops down, you know, in some markets into the $2 range, that certainly helps car travel and people being out on the road. You know, obviously, we were really, you know, propelled by, you know, new account wins.

But even taking that away, you know, we continue to gain share in our convenience segment, you know, both at the chain level, the regional level. So, you know, our segment's performing well. And to your point, I think there are some signs of improved performance and traffic in convenience.

Ben Wood: Great. And then just kind of following up on that. In light of the announcement yesterday from Pepsi to pretty majorly lower price in some of their key snack brands, do you expect others to follow suit? And is there a possibility that some of the snack and convenience categories might become deflationary off of this? And how does that impact your different businesses?

Scott McPherson: I wouldn't want to make predictions on whether other snack categories would become deflationary. That would be, you know, I've been in this space for thirty years. I've never seen those categories become deflationary. Yesterday's announcement was very interesting. You know, what I have since heard is that's primarily just on the big bag. So right now, we don't see that as being a big impact on our convenience segment. Certainly, that could change in pass along to some other SKUs. But, you know, I don't see that becoming an industry trend just based on my historical experience.

Ben Wood: Great. Thank you.

Operator: We'll move now to Lauren Danielle Silberman with Deutsche Bank. Please go ahead.

Lauren Danielle Silberman: Thank you. So I wanted to go back on the OpEx side. Can you help us understand how core underlying OpEx is growing ex Cheney? I guess I'm trying to understand how much of the growth is investments in the core business, Salesforce, versus some of the noise that's changing with the new facilities coming online?

Scott McPherson: No. It's a great question, Lauren. I would say and think I said a little earlier in the call, I would say there's certainly always opportunity in getting more expense leverage, you know, across all of our segments. I would say in the core food service segment, you know, quarter over quarter, our expense performance was fairly consistent. We are certainly seeing leverage as a percent of gross profit dollars in our expenses. So, you know, feel good about how the core is performing. Certainly, to improve. But, you know, the bulk of our miss in OpEx from what we anticipated was really just the overrun we saw in Chaney.

Lauren Danielle Silberman: Okay. I guess in the back half of the year, any way to frame how we should be thinking about that growth now that it's in the full segment year over year clean? And I guess is the overrun more of a pull forward of expenses or higher overall expenses?

Scott McPherson: No. I think it was really situational just to Cheney. And as I talked about with new buildings coming on, some of the things that we're doing to get them to be part of our overall, you know, public organization is certainly added some cost to them. So, you know, we expect that to continue a little bit into the third quarter. As we called out. But, you know, in the long run, you know, we're a company that's really focused on getting OpEx leverage across all our segments. And, you know, feel very comfortable that in our full year, we'll get that in a position that we feel really comfortable with.

And that was all, obviously, contemplated in our guidance for the full year.

Lauren Danielle Silberman: Okay. And then if I could just go on the promotional environment, can you talk about what you're seeing in amongst competitors? Any changes in the promotional environment especially as one of your competitors seems to be building some momentum, and then there's just the moving pieces of product inflation and how different peers react.

Scott McPherson: Certainly. You know, what I said earlier, what I consistently look at is market share gains. And I think we have performed exceptionally well, you know, this quarter, last quarter. And now as I look back for a number of quarters, market share gains have been very consistent across the independent space, across the chain space as well. You know, so from that perspective, I feel good about how we're performing. That's really my focus. You know, as far as the competitive environment, you know, I would say it's always competitive, I wouldn't say that I saw anything different, you know, this quarter or last quarter than I've seen, you know, from prior quarters.

Lauren Danielle Silberman: Thank you very much.

Scott McPherson: You bet. Thank you.

Operator: We'll move next to Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour: Brian, we can't hear you.

Operator: Yeah. Your line is difficult. Are you able to pick up a handset?

Brian Harbour: Can you hear me now?

Operator: Yes. Perfect.

Brian Harbour: Okay. Great. On your deflation comments, can you remind us how those products get marked up? And I guess, you know, for, like, cheese, for example, I mean, how much is this sort of like, category issue if you think about pizza? You know, in contrast to chicken, I would think that, you know, that's demand is still very good there. Could you just elaborate on that?

Patrick Hatcher: Yeah. So just I'll try to keep this high level, but, you know, we're gonna, we take our independent customers, we're gonna have a markup on cost, and our salespeople are the ones that determine that. A deflationary environment, what's happening with these two commodities is there's oversupply. There's a lot of supply. A lot of capacity came on with cheese. And so it's at a very low point. And same thing with poultry. They're able to increase their supply significantly. They do this from time to time, and they go oversupply, and then they go undersupply. So again, it's really just our over-indexing because of our customer base in those two commodities that we called this out.

Brian Harbour: Yep. Okay. Understood. And then just an inconvenience, I guess I would assume that there's sort of, you know, secular pressure on snack foods and that it's not just the inflation that's happened there, but sort of preference I think we're seeing that in grocery stores. So you know, how much do you think that do you agree with that? And do you think that, you know, the convenience stores are sort of committed to replacing some of those products with perhaps healthier options or more on-trend options? Do you think that's happening fast enough such that it sort of, you know, improves sales in that segment versus what you've been seeing?

Scott McPherson: No. It's a great question. There's a lot to unpack there. The first thing I'd say is just looking at product inflation. If you look at snack and candy, you know, I guess, since pre-COVID until today, you know, those are two of the categories that had the highest inflationary increases of any consumable product that's out there. So certainly, I think that price elevation had an impact on demand. And so, you know, Frito's response, you know, like I said, is surprised me a little bit because I do think the consumer is catching up. And, you know, so as we talked about, we've seen a little heightened demand over the last couple of periods in convenience.

As far as the mix of products, I think the one real opportunity for us is really in food service. You know, I think the convenience store more and more is becoming a relevant option for high-quality food options. And, you know, so as we think about consumer behavior changing, they want fresher, they want healthier, and, you know, convenience stores have an opportunity to fill that need. And we feel that, you know, we're somebody that can certainly fill that. As far as consumer packaged goods and that mix changing, there's been a shift in general to more healthier and convenience. And to your point, I think could this, you know, kind of dynamic accelerate it? Certainly, could.

But I think as we all know, it takes consumer package companies a while to get products to market. So I don't see anything dramatically happening quickly.

Operator: We'll move next to Peter Saleh with BTIG. Please go ahead.

Peter Saleh: Great. Thanks for taking the question. I did want to come back to maybe Jeff's question on the forward guide. Can you just talk a little bit about maybe what's embedded from a macro perspective going forward? I mean, we do have some, you know, much higher tax refunds coming through. That should benefit this quarter or maybe into the, you know, first calendar half of the year. Have you embedded any of that into your guide? Have you thought about that? I know you said January was a pretty good month. February, I guess, started off pretty slow. But I think the quarter is really defined by how March performed. So any thoughts on that would be helpful.

Patrick Hatcher: Yeah. Peter, that is a really good question. I spent a lot of time looking into the, you know, the tax refunds. The no taxes on tips or overtime that are gonna start coming through. Yeah. And other tailwinds, honestly. I mean, what's the World Cup gonna do? All these things as we go Q3 and Q4.

We did not embed those in our guidance, mainly because it's very hard to know what that flow-through is gonna be, but we do know that putting more money in the consumer's pocket, especially the folks that are maybe on the lower end, we'll see how much of that goes into the market and how much they use that for discretionary spend into restaurants. But we do know that's a very positive thing, and then we know that the World Cup should also be another tailwind, but we didn't put that in the guidance.

Peter Saleh: Great. I appreciate that. Can you also comment I think last quarter, George commented that there could be some changes to the SNAP benefits and that could have an impact. Have you seen any change on that front and any impact to date?

Scott McPherson: And there's some, you know, recently contemplated changes as well. But no, I can't say that we have seen any material impact on any of the changes or contemplated changes in SNAP at this point.

Peter Saleh: Thank you very much.

Operator: We'll move now to Karen Holthouse with Citi. Please go ahead.

Karen Holthouse: Hi. Thanks for taking the question. I wanted to dig into, you know, Florida a little bit and just kind of excluding Chaney Brothers or noise from that, your sense of just the underlying health of that market. I think we're hearing some concerns around travel tourism, particularly international tourism around theme parks and whatnot. Being down pretty materially. And then just as snowbird season has gotten underway, any risk that Canadians are avoiding the market this year?

Scott McPherson: No. I think it's a great question. And, certainly, we have our finger on that pulse pretty closely. You know, the one thing that I would say that I've been very pleased about with Chaney is their independent share gain. You know, they continue to grow independent share at a rate consistent with the rest of our business. And definitely, you know, we've been following very closely the travel patterns, and I've seen the recent theme park attendance. So I do think there's been a little bit of a slowdown with international travel and the Canadian travel in the marketplace. But I'll tell you, we have a ton of confidence in Florida overall.

I mean, that's been a state that's been growing consistently for a number of years. And, you know, I feel like that, you know, they're poised for a big rebound, and that's state. But, you know, we're performing really pretty well in the state, all things considered.

Karen Holthouse: And then one quick follow-up that just prior to the bigger weather events that we saw the last week or so, anything to comment in terms of geographic performance in the quarter today?

Scott McPherson: Oh, it's a really good question. Yeah. We had called out on prior earnings calls that we saw some slowness in the Midwest and we'd also called out areas where we had, you know, friends travel from Canada. But as I think back to, you know, last quarter, the start of this quarter, you know, particularly the start of this quarter, you know, January, which, you know, January isn't the bellwether month because it's a smaller month, but really saw a pretty consistent performance across the map. Didn't see any markets that had any material, you know, lulls or surges.

Karen Holthouse: Great. Thank you.

Operator: And once again, ladies and gentlemen, that is We'll turn next to Danilo Gargiulo with Bernstein. Please go ahead.

Danilo Gargiulo: Great. Scott, once again, congratulations on your new role. And I want to ask you a more strategic question to begin with. So as you embark in this new role, how would you like your era to be remembered for? In other words, where do you see incremental opportunities for performance going forward?

Scott McPherson: I really appreciate the question. I think it's a great question. One of the reasons that I'm at Performance Food Group Company, it's one of the reasons that, you know, as I was running Core Mark that we decided to merge with them is culturally, I truly foundationally believed in what George and Performance Food Group Company were doing as a company. So, you know, as I've worked with George over the last four years, I would say that, you know, we very much align in how we look at the business. I think fundamentally, we're both believers in driving growth, you know, both organically and through M&A.

I think we both pay particular attention to margin and, you know, how mix can help and drive margin. Culture is very important, you know, to me. And then I'd say if there's any, you know, anything that maybe is a little different is I probably have a little slant towards, you know, how are we gonna leverage technology? How are we gonna leverage that to be more efficient as a company? You know, but outside of that, I'd say, you know, George and I are our approach to the business is very consistent.

And my priority for this company is to continue to drive, you know, that top-line growth, but make sure that, you know, everything that we do allows it to flow to the bottom line and that we do, you know, with a great culture and make sure there's a great place for people to work.

Danilo Gargiulo: Okay. Great. Thank you. And you mentioned margin in your answer. And earlier, you also talked about the discovery that you really had with the, you know, during the process of a potential merger with US Foods on the procurement side. So I'm wondering, over what time frame do you expect performance to start closing some of the margin gap versus peers? You know, absent, obviously, the mix impact that it's gonna be favoring you over time. And what are some of the low-hanging fruits you think you could capture without impacting the case growth?

Scott McPherson: No. Another great question. I would say that the work we did in the clean room was just validation. We felt like when we, you know, sat down and put together our strategy for investor day, you know, this is a company as I called out in my prior remarks that's grown dramatically over the last ten years. And so we felt like as we sit down with our vendors and partner with our vendors that there's opportunity to create cost of goods benefits, to create logistics benefits, you know, just through our size and scale and creating efficiency with our vendor partners.

So, you know, I think the clean room exercise was just a further validation that opportunity exists and that, you know, we have a clear line of sight to go capture it. And the second, I'm sorry, the second part of your question?

Danilo Gargiulo: What is the right time frame for the closure of the margin gap?

Scott McPherson: Yeah. I think I've called that out a little bit. You know, we really incorporated that synergy into our three-year guide. And as I look at, you know, the cadence of that, I would say that, you know, we're in the early innings. We're, you know, in the first couple or a couple quarters of that. But we felt like and still feel like that's gonna flow, you know, fairly consistently year to year. So, you know, I think that my thinking there is unchanged.

Danilo Gargiulo: Okay. Thank you.

Operator: As there are no further questions in queue at this time, I would like to turn the call back over to Bill Marshall for any additional or closing comments.

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

Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time, and you may disconnect.

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