Corrected Transcript

06-Nov -2024

Performance Food Group Co. (PFGC)

Q1 2025 Earnings Call

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Performance Food Group Co. (PFGC)

Corrected Transcript

Q1 2025 Earnings Call

06-Nov-2024

CORPORATE PARTICIPANTS

William S. Marshall

Patrick Hatcher

Vice President-Investor Relations, Performance Food Group Co.

Chief Financial Officer & Executive Vice President, Performance Food

George L. Holm

Group Co.

Chairman & Chief Executive Officer, Performance Food Group Co.

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OTHER PARTICIPANTS

Mark Carden

Andrew Wolf

Analyst, UBS Securities LLC

Analyst, C.L. King & Associates, Inc.

Kelly Bania

Jeffrey A. Bernstein

Analyst, BMO Capital Markets Corp.

Analyst, Barclays Capital, Inc.

John Heinbockel

Brian Harbour

Analyst, Guggenheim Securities LLC

Analyst, Morgan Stanley & Co. LLC

Lauren Silberman

Edward Kelly

Analyst, Deutsche Bank Securities, Inc.

Analyst, Wells Fargo Securities LLC

Alexander Slagle

Peter Saleh

Analyst, Jefferies LLC

Analyst, BTIG LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Good day, and welcome to PFG's Fiscal Year Q1 2025 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.

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William S. Marshall

Vice President-Investor Relations, Performance Food Group Co.

Thank you, Shelby, and good morning. We're here with George Holm, PFG's CEO; and Patrick Hatcher, PFG's CFO. We issued a press release this morning regarding our 2025 fiscal first quarter results, which can be found in the Investor Relations section of our website at pfgc.com.

During our call today, unless otherwise stated, we are comparing results to the results in the same period in fiscal 2024. The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found in the back of the earnings release. 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.

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Q1 2025 Earnings Call

06-Nov-2024

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

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

Thanks, Bill. Good morning, everyone, and thank you for joining our call today. It has been a busy beginning to fiscal year 2025 as we have built business momentum, particularly in our Foodservice segment while closing two excellent acquisitions. This morning, I will discuss the early progress we have made on both José Santiago and Cheney Brothers, and then review some highlights from our fiscal first quarter. Patrick will then discuss our financial results and outlook for fiscal year 2025. I will then provide some closing comments before taking your questions.

We are proud of how our organization has performed over the past three months. Our three segments have executed our strategy very well and produced strong results. The consumer landscape has provided some challenges, but I am pleased to report that we have started to see signs of stability that we believe could put us on a solid foundation for the remainder of the fiscal year.

Before getting into more specifics on our business, I wanted to say a few words about our acquisition activity. As we discussed in August, we acquired José Santiago early in the fiscal year. José Santiago is a leading broadline foodservice distributor in Puerto Rico with good growth momentum and attractive margins. Over the past three- plus months, we have worked diligently to integrate their business into PFG's foodservice operations. This process has gone extremely well due largely to the hard work by the teams of both José Santiago and PFG. The team in Puerto Rico is proving to be an excellent cultural fit and has already contributed nicely to PFG's business results in the fiscal first quarter.

In early October, we closed the Cheney Brothers acquisition. I'd like to thank the team at Cheney Brothers as well as PFG for the long hours put in to get this deal across the finish line. We were ready for the early close raising $1 billion through the issuance of new notes during September, which allowed us to pay down a portion of our ABL facility and provided us with additional borrowing capacity to fund the acquisition. Patrick will discuss the financial details shortly.

While it has only been one month since the close of the Cheney deal, we have already made a great deal of progress onboarding Cheney's organization. We welcome the roughly 3,600 associates from Cheney Brothers to PFG. The southeast region representing the majority of Cheney's operations has experienced a difficult few months due to the hurricane activity. The focus of our organization has been, first and foremost, on the well-being of our associates.

As a foodservice distributor, we also play an important role in the food supply chain. As an organization, we have been able to ship much-needed food supplies across the southeastern United States and Puerto Rico. While it will take some time for these areas to fully rebuild, our businesses are fully operational and continuing to service our customers. I'm proud of the active role our company and associates played in assisting areas impacted by the storms. In addition to supporting organizations like the American Red Cross, Mercy Chefs and World Central Kitchen, our associates stepped up to help each other and the communities where they live and work by volunteering to provide supplies, food and meals to first responders and those impacted.

Looking ahead, we are incredibly excited about the opportunity Cheney Brothers brings to PFG. As discussed in August, Cheney's operations complement our legacy business. Cheney's strength in Florida, particularly with broadline independent customers, enhances our existing business in the region, which skews more towards the

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Q1 2025 Earnings Call

06-Nov-2024

specialty area of the business. Cheney Brothers distribution facility in North Carolina rounds out the portfolio, providing us with additional scale across the southeastern United States. Cheney Brothers assets, particularly their distribution facilities, are exceptionally high quality and state of the art. It is rare to find an asset that is operating at scale, but still has room to grow.

Cheney's excess capacity should enable us to accelerate growth, build scale and route density across the southeast region. In August, we provided data showing the positive demographic profile of this region, which is available on our website. Cheney Brothers exposure to independent restaurants is reflected in constant sales growth, high profit per case and EBITDA margin well above PFG's corporate average. At the same time, we believe that Cheney's relatively low private brand penetration provides a very attractive opportunity to enhance both top line growth and margins. Our legacy foodservice operations have been incredibly successful at expanding our Performance Brand offerings to independent restaurants.

In fiscal year 2014, Performance Brands represented just over 39% of independent brand share. In the most recent quarter, Performance Brands represented nearly 53% of total sales to independent restaurants. Many of you are familiar with the Reinhart acquisition and the value created from that transaction. Similar to Cheney, Reinhart was underpenetrated in private brands. But in the years since we have owned the operation, we have been able to expand Reinhart's private brand portfolio penetration to levels that are similar to legacy Performance Foodservice. We believe the private brand opportunity at Cheney is even larger.

In fact, our integration strategy for Cheney is very similar to that of Reinhart. We believe we have acquired a very high quality asset that is on excellent growth trajectory. Our initial efforts were focused on integrating the organization while minimizing any impact to Cheney's associates, customers and suppliers. Over time, we will share best practices across the two organizations and expect to accelerate sales and profit growth as a combined entity. Patrick will discuss some of our specific financial goals from the transaction in a moment.

The Cheney Brothers transaction fits nicely with our total PFG strategy to continue to build upon a leading position in the food-away-from-home space. Cheney is another high-quality growth asset in the foodservice space, and we are excited to add this organization to PFG.

Foodservice is an important piece of the total PFG portfolio. However, what defines us are the additional avenues for growth, including Vistar and Core-Mark. The combination of these three units provides a powerful offering that we believe appeals to customers across the food-away-from-home landscape. As our organization continues to grow both organically and through targeted M&A opportunities, PFG is increasingly a leader in the food-away- from-home space.

In late October, IFDA held its National Championship event in Orlando, Florida. The event honored some of the industry's safest associates, allowing them to compete in a range of skill competitions. PFG had a fantastic showing, including 95 associates and over 300 PFG attendees, including family and friends to support the event. PFG's associates accepted a number of awards across multiple categories within warehouse and transportation events. Four of our competitors' children were recognized for their essays detailing why their PFG parent was their hero. It's a great event, and PFG is proud of participating in leading the industry forward.

In October, our Core-Mark business displayed its strength in the convenience space at the National Association of Convenience Stores Conference. Core-Mark's offerings, not only in traditional center-of-the-store convenience but in foodservice products, tailored to the convenience landscape set PFG apart. Our three segments are working together to create cross-selling opportunities that we believe will produce additional market share opportunities.

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Q1 2025 Earnings Call

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Technology is an increasingly important part of our cross-segment collaboration and selling. One platform that we are particularly excited about is our CustomerFirst digital ordering application. We began discussing this initiative at our June 2022 Investor Day. Since then, we have expanded the offering across the organization and are seeing excellent progress.

At PFG, we believe that our sales force should always be at the front line of our selling efforts, a key competitive advantage that has allowed our company to consistently gain market share. At the same time, we have continued to provide our sales team and our customers with the tools, resources and knowledge to help them grow their businesses. Importantly, CustomerFirst will eventually be rolled out across all three business segments, allowing cross-selling opportunities that we believe will further enhance our value proposition.

Overall, I am proud of our organization's performance and believe that we are well positioned to continue executing our growth strategy.

I'll now turn it over to Patrick, who will review our financial performance and outlook. I will then return with some final comments on our quarter and the business environment. Patrick.

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Patrick Hatcher

Chief Financial Officer & Executive Vice President, Performance Food Group Co.

Thank you, George, and good morning. PFG is off to a strong start in fiscal 2025, with net sales results at the upper end of our previously disclosed guidance range and adjusted EBITDA just above the midpoint of our previously disclosed guidance range. We are very pleased with the top line momentum, which has slightly accelerated early in the fiscal second quarter, providing a high degree of confidence in our 2025 outlook.

Before discussing our fiscal 2025 plan, let's review some highlights from our first quarter. PFG's net sales grew 3.2% in the fiscal first quarter, a 1 point acceleration compared to the fourth quarter of 2024. Our top line performance remains balanced between volume improvement and net price realization. Total case volume increased 2.6%, including a 7.8% increase in total independent restaurant volume. Excluding acquisitions, our total volume increased 1.2% in the fiscal first quarter, including a 4.3% gain in our independent restaurant cases.

As we enter the fiscal second quarter, we are seeing a slight acceleration in both total and independent case growth, which we believe is a reflection of our customers driving foot traffic and signs of stabilization from the consumer. The total company cost inflation was about 5% for the fiscal first quarter. Foodservice cost inflation was 3.8% in the quarter, an acceleration from the end of fiscal 2024 due to double-digit year-over-year inflation in poultry and cheese.

Cost inflation in the Convenience segment was 7%, consistent with the trends seen in the fiscal fourth quarter. Vistar's cost inflation continued to decelerate sequentially and was up 1.9% in the fiscal first quarter on a year- over-year basis. Inflation was slightly more than anticipated in the quarter, particularly in the Foodservice segment, though we believe we are well equipped to manage the price volatility as a normal course of business.

Total company gross profit increased 6.1% in the fiscal first quarter, representing a gross profit per case increase of $0.23 in the first quarter as compared to the prior year's period. We have continued to see excellent cost control once again, led by an outstanding profit performance from Foodservice and Convenience segments. Both Foodservice and Convenience produced double-digit adjusted EBITDA growth in the quarter, increasing 13.8% and 11.2%, respectfully. Vistar did see a modest adjusted EBITDA decrease driven by continued lower foot traffic in some of our customers' channels. The balance across our three segments displays our strong diversification strategy. We anticipate Vistar's results to improve towards the back half of the fiscal year.

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Q1 2025 Earnings Call

06-Nov-2024

We expect to build upon these strong profit results as we move through fiscal 2025, which I will address in a moment when I review our guidance. In the first quarter of fiscal 2025, PFG reported net income of $108 million. Adjusted EBITDA increased 7.3% to approximately $412 million, above the midpoint of the guidance we announced last quarter. Diluted earnings per share in the fiscal first quarter was $0.69, while adjusted diluted earnings per share was $1.16, a 0.9% improvement year-over-year. Our effective tax rate of 26.5% in the first quarter was up slightly compared to the 26.1% rate in the last year's comparable period.

Turning to our financial position and cash flow performance, in the first three months of fiscal 2025, PFG generated $53.5 million of operating cash flow. This includes a sizable investment in candy and tobacco inventory during the quarter in anticipation of future potential price increases. We often invest in increasing the inventory of these two categories because of manufacturer pricing activity, which allows us to generate a holding gain profit. We believe that this is a very efficient use of our balance sheet and cash flow position, generating a high rate of return in future periods.

We also increased our capital spending in the quarter to $96.5 million. We've been actively building new capacity and state-of-the-art warehouse facilities as well as building our fleet to support our long-term growth. Some of the capital spending is a catch-up from delays in building and fleet purchases due to disruption in the global supply chain following the pandemic. In fact, we expect over 10 new building projects to come online over the next 12 months. We believe these new facilities will not only support our consistent top line growth, but also incorporate designs and technologies to provide long-term cost efficiencies.

Our balance sheet remains healthy, supporting our capital projects and M&A activity. Our debt balance has increased during the fiscal first quarter, reflecting the ABL borrowings used to finance the José Santiago acquisition, putting our leverage just above the midpoint of our 2.5 times to 3.5 times target range. As you know, we closed the Cheney Brothers acquisition early in the fiscal second quarter. As a result, we expect our net leverage to be above the top end of our target range when we close the second quarter.

We expect to use available cash flow to pay down our ABL facility and bring our leverage back to within our target range over the next several quarters. We feel very comfortable with our debt balance at this time and have historically operated well above our current leverage. With that said, we believe our 2.5 times to 3.5 times target range provides future opportunities to use our balance sheet to finance reinvestment, including capital spending, M&A, and share repurchases.

On the topic of share repurchases, during the fiscal first quarter, we paid $29.5 million to acquire 0.4 million shares of our company at an average price of $74.69. There is about $181 million remaining on the $300 million share repurchase authorization. While our share repurchase activity remains active, we may execute lower levels of buybacks due to the early closing of the Cheney acquisition as we look to reduce our leverage in the short term. With that said, our share repurchases reflect several factors, including market conditions, our share price, and relative valuation, and we may become more active with our share repurchases depending on those conditions.

Turning to our guidance for fiscal 2025, for the full year, we expect net sales to be within the $62.5 billion to $63.5 billion range. We expect adjusted EBITDA to be in a range of $1.7 billion to $1.8 billion. We increased both our net sales and adjusted EBITDA outlook with the close of the Cheney acquisition early October. These ranges include estimated Cheney results representing approximately 12 of the 13 weeks in the fiscal second quarter and a full year's benefit from José Santiago. We feel very comfortable with our net sales and adjusted EBITDA targets and have become increasingly optimistic due to improving industry trends.

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Performance Food Group Co. (PFGC)

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Q1 2025 Earnings Call

06-Nov-2024

For the second fiscal quarter of 2025, we anticipate net sales to be in a $15.2 billion to $15.6 billion range with adjusted EBITDA in a $400 million to $420 million range. As a reminder, the Cheney acquisition will only impact

12 weeks versus 13 weeks of the quarter's financial results. Our guidance includes the expected benefits from the Cheney acquisition that we discussed in August, notably $50 million in annual run rate synergies by the third full fiscal year following closing, and accretion to adjusted diluted EPS by the end of the first full fiscal year, including year one synergies.

To summarize, we are very pleased with our start to fiscal 2025. Our underlying business is on a strong footing, setting us up well for the future. Meanwhile, we have closed two excellent acquisitions since the beginning of the fiscal year, and both are expected to add nicely to our growth and margins. Our balance sheet is healthy, and we intend to continue to use our financial position to create shareholder value through reinvestment in our businesses, along with selective M&A, share repurchase activity, and leverage reduction.

Our capital allocation decisions are always based on marketplace conditions, but at this time we would expect to emphasize debt reduction due to the timing of the Cheney close.

I would now like to turn it back to George, who will close with some thoughts about our results and industry.

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

As Patrick mentioned, we are excited about the future of our business. All three of our operating segments are executing well despite a challenging external environment. Our Foodservice segment has continued to build market share and grown cases ahead of the industry trends. Convenience continues to pick up momentum. Despite industry declines in convenience, our business outperformed all major categories and was able to increase sales and profit nicely.

And as we look out across the landscape, we are starting to see a better backdrop. Vistar continues to experience a challenging macroeconomic environment, but we are pleased with the progress they have made on several emerging channels and are confident that they will resume the strong top and bottom line momentum that we are accustomed to seeing.

As we look across the landscape, we are pleased to report that over the past few weeks we have seen an uptick in our volume performance, particularly in independent restaurants, and expect our fiscal second quarter to improve sequentially. Keep in mind, we experienced a very strong December in fiscal 2024, but as we enter the back half of the year, we are increasingly confident that we will experience an acceleration in our top and bottom line trends.

Our results, both with our underlying businesses and the new opportunities that Cheney and José Santiago, are due to the hard work of our associates across the country. I believe we have some of the best talent in the foodservice industry, and I am confident that we will continue to build upon our position as a leading foodservice distribution company in the United States.

Before opening the line to take your questions, I wanted to take a moment to recognize Pat Hagerty ahead of his upcoming retirement. Pat has been part of the Vistar organization for over 30 years, most recently serving as PFG's Chief Commercial Officer. Pat has been an integral part of our company's success for decades. In 2008, he was named President and CEO of Vistar and went on to shape that organization into what it has become today. From the time Pat took the helm at Vistar through the end of fiscal 2024, the organization has expanded

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06-Nov-2024

into a number of new channels, growing the top line by over 240%, and become the highest margin contributing segment to Performance Food Group's bottom line. I would like to personally thank Pat for his decades of service and dedication to our organization. I wish him the best in retirement.

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.

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QUESTION AND ANSWER SECTION

Operator: [Operator Instructions] And we'll take our first question from Mark Carden with UBS. Your line is open.

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Mark Carden

Analyst, UBS Securities LLC

Q

Good morning, guys. Thanks so much for taking the question. So to start, just on the sales force, are you guys seeing much of a normalization on your pace of hires at this point? And has compensation for these hires shifted at all, just given the tough macro? Thanks.

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

A

Yeah, we've been fairly consistent with the growth of our sales force. We're running in the 5% to 6% range, and that's about where our growth has been running of late. So, we feel good about what we're doing there, and really no big changes from a comp standpoint. Our people are commissioned salespeople, so they, to some degree, write their own paycheck.

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Mark Carden

Analyst, UBS Securities LLC

Q

Okay. Great. And then just in terms of on your independent case growth, obviously, it picked up a little bit from July. It sounds like you exited the quarter on a high note. How did it play out throughout the quarter from a cadence perspective? And then, are you seeing any surprising pockets of strength or weakness from a category standpoint just within your business?

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

A

Yeah, we're seeing 1 point to 2 point increase better than we ran in the first quarter so far. But I want to caution that the second fiscal quarter last year for us, we had 8.7% independent case growth, and December was 10.9%, a strong kind of party season, and the calendar fell very well as far as the amount of time between Thanksgiving and Christmas.

So that said, each week actually has gotten better since we've gotten into the second quarter. So, we're real confident and particularly confident about the back half of the year. And we're continuing to add people. We would like to get a little bit above that range we're at right now, that 5% to 6% and more to the 7-plus percent increase in salespeople, and we're determined to get there. We just have to find the right people.

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Mark Carden

Analyst, UBS Securities LLC

Q

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06-Nov-2024

Thanks so much. Good luck.

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

Thanks.

A

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Operator: Thank you. We'll take our next question from Kelly Bania with BMO Capital. Your line is open.

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Kelly Bania

Analyst, BMO Capital Markets Corp.

Q

Good morning. Thanks for taking our questions. George, I was wondering if you could just kind of elaborate on the signs of the stability. I mean, you talked about a little acceleration here, I think it sounds like with independents. But can you maybe go channel by channel and what you're seeing in consumer behavior, what you think is changing? And then I just had a quick follow-up with respect to Cheney, if we have time.

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

A

Okay. At this point, I don't know that how much of our increase that we're experiencing so far this quarter is us just doing a better job or the market itself. I think we'll get a better feel for that as we get some of our market share numbers. But our ability, I guess, to gain share in the independent has been quite consistent. It's just that the market has been down. From what we see, it's somewhere in that 3% negative to the previous year. If you look at last year, though, as we got through our fiscal second quarter, I'm sure everyone remembers that January was really tough. So, we expect to see some better increases as we get further into it.

As far as where that growth is coming from, for us, it certainly has not come from casual dining chains. We have some that are really struggling there. We've seen some fast food chains that we supply do better, but they're more at the high end of the QSR. And then our independent business is really more towards the high end, and I think that there's challenges probably in maybe that bottom 20% of income. And we're still seeing those - I would say, more price-sensitive QSR chains, we're seeing them continuing to be challenged, this year's numbers versus last year's numbers.

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Kelly Bania

Analyst, BMO Capital Markets Corp.

Can you talk a little bit about Convenience and Vistar on the same note?

Q

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

A

Sure. I think that there's an adjustment going on there in Convenience with price increases. I mean, they're used to price increases. As we've said earlier, they have a 5% inflation rate, which to us is still high, and I think the consumers just adjusting to that. And we're running mid-single-digit same-store sales declines in that business. As far as Vistar goes, we have some challenges in the theater part of our business. Number one, it being somewhat soft; and number two, we have some competitive challenges there.

In retail, we've seen the same thing as far as the traffic not being there. Value stores more so not being there. And then we've had several closings of accounts where we had the, I guess I would call it, the impulse buy business,

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06-Nov-2024

the product that's at the cash register. And then we've seen it in value stores where there's been some fairly heavy closings.

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Kelly Bania

Analyst, BMO Capital Markets Corp.

Q

That's helpful. And then just wanted to ask about Cheney and the integration timeline. Has anything changed with how you approach integrations of acquisitions of that size? And I guess, particularly, I was wondering if you had any color on the cadence of the synergies that you expect kind of year one, year two, year three.

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

A

Yeah. Well, the integration - I guess it depends on how you define integration, but we're doing our best to only do the things that we need to do. We put them through a lot, as you can imagine, with due diligence. They spent some long hours. We're just getting the integration done that we need to get done, I guess, as a public company would probably be a good way to put it.

And then as far as synergies, I think a lot of those will develop in the second and third year. We don't look at getting synergies from the people part of the business. They're running intact, and that's what we want. They're doing very well, by the way. I know it's only one month, but their sales growth has been really pleasing. And a lot of it will come from brands, as we mentioned.

But with those brands, first of all, we need to figure out what brands they have today that we would adopt as a company and consider them to be our brands. And then as we offer the product up to them, it's their decision as to whether or not they use our branded products. And that typically takes time, but no different than a Reinhart situation or a Core-Mark or Merchants, we'll get the synergies. They may come quick. They may come slow. And I mean that it could be either way. It just depends on what they want to adopt. And what's more important than when we get those synergies is how the company continues to perform as part of our company. Sometimes you can get so focused on getting those synergies that it has a negative impact on the company.

And going from a private company where they can pick up their cell phone and call the owner and have a conversation to being part of a large public company, we want to make that as seamless as possible for the people. So, we're not overly focused right now on synergies, but we're very confident that those will develop.

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Kelly Bania

Analyst, BMO Capital Markets Corp.

Thank you.

Q

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Operator: Thank you. We'll take our next question from John Heinbockel with Guggenheim. Your line is open.

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John Heinbockel

Analyst, Guggenheim Securities LLC

Q

Hey, guys. I want to start with the 10 new buildings, right? So, can you sort of talk through what segments they're in. Are they net new facilities? Are they replacements, automation, right? And have you been capacity constrained, not from a salesperson standpoint but from a physical standpoint?

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PFG - Performance Food Group Company published this content on November 13, 2024, and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on November 13, 2024 at 14:53:05.261.