Executives: Michael Neese - VP, IR George Holm - President and CEO; Director James Hope - EVP and

CFO
Analysts: Edward Kelly - Wells Fargo Chris Mandeville - Jefferies Bill Kirk - RBC Capital Markets Karen Short - Barclays John Heinbockel - Guggenheim Securities Vincent Sinisi - Morgan Stanley Judah Frommer - Credit Suisse Andrew Wolf - Loop Capital Markets Ajay Jain - Pivotal Research Group Bob Summers - Buckingham Kelly Bania - BMO

Capital
Operator: Good day, and welcome to the PFG Fiscal Year 2019 Q1 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by PFG's management and the question-and-answer session. I would now like to turn the call over to Michael Neese, Vice President, Investor Relations, for PFG. Please go ahead, sir.

Michael Neese: Thank you, Bridget.

And good morning. We're here this morning with George Holm, Performance Food Group's CEO; and Jim Hope, PFG's CFO. We issued a press release regarding our 2019 fiscal first quarter results this morning. The results discussed in this call will include GAAP and non-GAAP results adjusted for certain items. A reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found at the back of the earnings release.

You can find our earnings release in the investor relations section of our website at pfgc.com. Our remarks in the earnings release contain forward-looking and cautionary statements and projections of future results. Please review the 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 forward-looking statements and projections. Before I hand the call over to George, I want to point out a change in our segment reporting beginning in our fiscal first quarter. We changed our operating segments to reflect the manner in which the business is managed.

Based on changes to the company's organizational structure and how the company's management reviews operating results and makes decisions about resource allocation, the company now has two

reportable segments: Foodservice and Vistar. Foodservice includes independent and chain customers, our specialty meat and seafood customers and casual dining. Additionally, consistent with how management assesses performance of these segments, certain administrative costs and corporate allocations previously reported at the segment level are now included within Corporate & All Other, as opposed to the Foodservice segment. The tables at the end of the earnings release have been adjusted to reflect these segment changes. Now I'd like to turn the call over to George.

George Holm: Thanks, Michael. And good morning, everyone, and thanks for joining our call today. I would like to discuss a couple quick highlights of our first quarter results. First, our results were in line with our expectations. Vistar had another strong quarter, growing EBITDA by over 20% fueled by its theater, retail, office coffee service, e-commerce and hospitality channels.

We believe our Foodservice strategic investments in people and technology are on track to support our growth objectives for fiscal 2019 and beyond. Our double-digit net earnings growth and free cash flow were strong. As I mentioned to you last quarter, we are continuing to invest in our customer-facing technology to further enhance our customer's experience. We also made a small investment in a growing technology company called Omnivore, which is a universal point-of-sale connectivity platform for restaurants enabling hundreds of third-party technologies to integrate seamlessly with a diverse POS landscape. We expect our new partnership with Omnivore will enable our customers to gain better access to their data and will enable us to take meaningful technologies to our customers that address opportunities to enhance the customer experience.

Now let's turn to our two segments. As Michael discussed earlier in his remarks, considering management changes and how it was reviewing the data, we decided to change our operating segments. We now have two

reportable segments: Foodservice and Vistar. We believe we will achieve certain efficiencies on how we look at the 48 distribution centers in Foodservice. This will also provide us the flexibility to service customers from both Customized and Performance Foodservice.

We are consolidating the corporate offices for Performance Food Group, Performance Foodservice and Customized. This will enable future centralization of corporate functions. Vistar will stay the same as it is reported today, and it is a more centralized environment. Our teams' focused attention enabled us to generate total case growth of 3.7%, which is in our stated case range of 3% to 5% this fiscal year. As you would expect, Hurricane Florence had a minor impact on our operations and customers, specifically in the Carolinas and Virginia.

Fortunately, all of our associates are safe, with a very little physical damage to our distribution centers. We estimate that the net impact from the hurricane on our Foodservice segment adjusted EBITDA to be approximately $1 million. Vistar delivered strong top and bottom line results this quarter. Net sales increased 12% and EBITDA grew by more than 22%. The top line increase was driven by broad-based case growth across all our channels.

As you may recall, Vistar is now lapping the purchase of CCSI. And the expenses are declining, and we expect continued tailwinds throughout the fiscal year from these expense reductions. Now I'd like to highlight two of our associates. Last week, the international food service distribution association inducted its first class of honorees to the IFDA trucker driver hall of fame. I am proud to say that among the 26 inductees were 2 PFG associates, Leslie Fisher and Maxie Owens.

Leslie has been a driver for PFG Tennessee for 30 years and has driven over 1 million miles. With his quiet and mild-mannered nature, he has been an unsung hero of our company in the industry. Maxie has been a driver for PFG Florida for over 25 years. He too has driven over 1 million miles and has made at least 30,000 deliveries. That adds up to over 2 million cases delivered, receiving nothing but compliments from customers along the way.

We are pleased to share our pride and appreciation for Leslie's and Maxie's decades of exceptional service. I will now turn the call over to Jim, who will discuss our first quarter results in more detail.

James Hope: Thank you, George. Good morning, everyone. Let's take a look at our first quarter consolidated financials results.

We're pleased to deliver $4.5 billion in net sales for the quarter, an increase of 4% compared to the prior year period as a result of growth in Vistar; and case growth in the Foodservice segment, specifically in the independent channel; and a slight impact of inflation. The increase in net sales was also attributable to an increase in selling price per case as a result of inflation and mix. Overall, food cost inflation for the quarter was approximately 0.6%. We witnessed deflation sequentially from the fourth quarter through the first quarter. Deflating items include meat, poultry and cheese.

We also witnessed some items inflating such as eggs, disposables and frozen foods. Gross profit grew 7% compared to the prior year to $593.6 million. And the strong gross profit increase was led by case growth and from selling an improved mix of customer channels and products, specifically in Vistar's channels and to the independent restaurant channel. Gross margin as a percentage of net sales was up 40 basis points over the prior year period to 13.1%. Operating expenses rose by 7.7% to $543 million.

As expected, we experienced cost increases associated with hiring sales, delivery and warehouse associates. We also witnessed higher fuel prices. The vast majority of the overall increase in operating expenses was attributable to these costs. We continue to believe this is the right time to strategically invest in our Foodservice segment to support future growth. Net income for the first quarter grew 24.8% year-over-year to $28.2 million.

The growth was primarily a result of a $6.6 million decrease in income tax expense, partially offset by interest and other expenses. The decrease in income tax expense was primarily a result of the impact of the Tax Cuts and Jobs Act. The effective tax rate in the first quarter of fiscal 2019 was 20% compared to 37.5% in the first quarter of fiscal 2018. Decrease in the tax rate was due to a lower statutory tax rate and the excess tax benefits associated with exercised and vested stock awards in the first quarter of fiscal 2019. Our fiscal 2019 full year tax rate, including the first quarter, is projected to be approximately 26%.

Diluted EPS grew 22.7% to $0.27 in the first quarter. Adjusted diluted EPS increased 25.9% to $0.34 per share in the first quarter over the prior year period. Now let me take you briefly through our segment results. Net sales for Foodservice increased 2.2% to $3.6 billion compared to the prior year period. Net sales growth was driven by an increase in cases sold, including independent case growth of 4.8% and solid independent customer demand for Performance Brands.

First quarter EBITDA for Foodservice decreased 5.3% to $92 million compared to the prior year period. This decrease was driven by a result of higher operating expenses and labor costs, rising fuel costs and approximately 100 basis points due to Hurricane Florence. We expect the labor market to remain challenging for the foreseeable future. And as a result, we are making continued investments that we believe will pay off and support long-term growth of our businesses. Vistar had another robust quarter.

Net sales increased 12% to $892.6 million compared to the prior year period. First quarter EBITDA for Vistar increased 22.5% to $31.6 million versus the prior year period. Gross profit dollar growth of 16.9% for the first quarter of fiscal 2019 compared to the prior year period was fueled by an increase in the number of cases sold. And the CCSI integration continued to show good improvement, and we expect solid synergies from the transaction. Now let's turn to cash flow.

PFG generated $32.3 million in cash flow from operating activities, an increase of $16.3 million versus the prior year period. The improvement in cash flow from operating activities was largely driven by higher operating income and improvements in working capital. PFG delivered free cash flow of $7.3 million, an increase of approximately $7.8 million. For the first quarter of fiscal 2019, PFG invested $25 million in capital expenditures, an increase of $8.5 million versus the prior year period. We have several projects underway, and these projects will provide us future case growth.

And our return on invested capital significantly improved during the quarter. In our earnings release this morning, we reaffirmed our fiscal 2019 adjusted EBITDA growth to be in a range of 7% to 10%. We expect that the 7% to 10% adjusted EBITDA growth for fiscal 2019 will reflect first half growth in the mid-single-digit range. Second half adjusted EBITDA growth is expected to be in the high single to low double-digit range. Fiscal 2019 first half growth is expected to reflect strategic investments in sales, warehouse and delivery associates.

We also reaffirmed our fiscal 2019 adjusted diluted EPS to grow in a range of 10% to 16%. And with that, I'm going to turn the call back to George.

George Holm: Thanks, Jim. Before we take your questions, I want to briefly cover the health of the industry. I believe food away from home continues to grow.

Where and how consumers eat is evolving. Technology in delivery is paying - playing a key role in this growth. As I've been saying for about the past 10 months, independent same-store sales seem to be slightly declining. This is just reflective of our customer base. We are gaining share in our independent customer base.

We feel confident with that. And we continue to grow our customer base, but we are going through - really this is our fourth quarter where our number of line items that we sell to independent customers is growing faster than our cases. And to us, that's a signal that the same-store sales are continuing to be slow. We have several chains that have been growing their same-store sales in the recent quarter, and we're benefiting from that trend. We are experiencing a great deal of promotional activity from those chains, and I suspect that is probably having some impact on independents.

We believe we are well positioned for both independent and chain growth as we move deeper into this fiscal year. We have taken strategic actions in the face of certain headwinds to fuel our performance this year and to support our growth over the next several years, while we have certain near-term OpEx challenges, which include higher costs from labor and fuel. We expect these to continue at a similar rate for the next quarter, but they are manageable. There continues to be highly publicized driver shortages in our country. In addition to being focused on attraction, perhaps our most important efforts are around retention.

We are making progress on better understanding what we can do to support our drivers and warehouse workers at work, at home and in their day-to-day jobs. As we've previously discussed, we stepped up our hiring of sales associates in the fourth quarter of last fiscal year. We believe this will help our continued market share gains in Foodservice as we head deeper into fiscal '19. In summary, our associates are determined now more than ever to provide the best customer experience, and we believe we have the right strategies to deliver best-in-class service and sustainable annual growth. With that, we're here to take your questions.

Operator: [Operator Instructions] And your first question comes from Edward Kelly with Wells Fargo.

Edward Kelly: George, could we start with the combining of the broadlines and the Customized operating divisions? Maybe just talk about the rationale. How do we think about the savings? It does seem like there could be material savings behind some of this. And what does it mean in terms of how you think about the business from an operating perspective going forward?

George Holm: Yes, I'm going to have Jim address that question, but I'll probably make a few comments afterwards.

James Hope: Yes.

I would say, Ed, coming out of the gate, I wouldn't think so much about savings immediately as I would think about our company operating more efficiently, servicing our customer better. And I'm very excited about the three corporate offices coming together and combining and working as 1 team. Now there - we're doing some joint work with our broadline and chain segment, as George mentioned, regarding customer but also a little bit in procurement, inbound logistics and, of course, the shared customers. The two segments are partnering together, and I think that's equally as important. And the other reason, of course, we made this segment change is George is viewing the businesses as one.

George Holm: I think it's also important that we state that we do feel that we're going to be able to do better from an expense standpoint by doing this but important to also note that we're not going to do anything from a customer-facing standpoint that's going to change. So the savings are going to be more back office.

Edward Kelly: And just where do you stand in terms of a decision around the leadership of the division at this point?

George Holm: Well, right now we don't have plans near term to put somebody permanently in that position. We have a very experienced group of regional presidents. Every one of them has at least 25 years in this industry, and we have had no changes in the people in those roles since 2008.

When we combined the two companies, we've added one but have had no changes. And all of the people that are in those positions also came from legacy PFG or legacy Vistar Roma. So we're in good shape with that group of people, and for today, I think we're best off to continue there.

Edward Kelly: And then just a follow-up here. I wanted to hit on the investments that we heard about last quarter.

Can you talk about the impact that this is starting to have on your business operationally? So how are fill rates? How is employee retention and hiring in both the warehouse side, on the driver side? What are you seeing out of the sales force? I know it's kind of early there. And then are you still confident that we've seen what seems to be the peak of the investment in kind of like the first part of this year?

George Holm: Well, I'll start with the operational part of it. We want to continue to improve the levels of service that we're providing. I will say that we went through a period of time in certain distribution centers where we're providing service that we weren't necessarily very proud of. So increasing the amount of people that we have in our driver force is very important to us.

And what we're seeing today is that your - it's not really a turnover issue. We lose very few people that are experienced at our company as drivers. It's more around a churn issue, and that's getting the new drivers to pass kind of maybe that 1-year standpoint where we tend not to lose them. We've also found that - maybe a quality-of-life issue, maybe just the preference of people today that they don't really want the overtime that we've kind of run this business within the past. So we need to get enough drivers onboard that we are, number one, handling replacements that we need, retirements, those type of things.

Two, we need them for our growth. And then three, we need them also so that we can have less hours than we have today for our people. I see us continuing to add to that driver force. And I think it's an expense, but it's something that will be a real positive for us in our future growth. Warehouse, a high-turnover area, always has been.

We saw a jump in that turnover. And same thing, churn, more so than it would be your classic type of turnover. And we're just managing our way through it, doing the best we can and making progress. When it comes to the sales force, we mentioned that we added a good bit in the fourth quarter. That started in fiscal third quarter last year, so what we'll see as we get into next quarter is more people coming off no compete.

So we'll have more productive, I guess, sales people out there than we do today. And we'll see less of a ramp-up in the number of people, so we'll be up against higher expenses a year ago than we'll be running this year. So that'll be a positive for us. That said, as a company, we're not going to pass on the opportunity to hire any competent drivers or competent salespeople today. They're both a big part of our future.

Operator: And your next question comes from Chris Mandeville with Jefferies.

Chris Mandeville: Can we start with just, I guess, on the total cases of up 3.7%. I think, if I recall correctly, in the Q4 call you had mentioned that you started the quarter off better than what - or how you exited Q4. And independents were running over 6% in July. So could you provide just some color on the cadence there within this quarter?

George Holm: Yes.

Well, this quarter right now as we talk, we're only 5 weeks into it, our total case growth is a good bit better than it was in the first quarter. Our independent Foodservice business is comparable to the first quarter. We did get off to a very strong start in July, less so in August and September. And right now we're running about the same rate that we ran for the first quarter in independent Foodservice business.

Chris Mandeville: And as we move into Q2 for independent cases and then really the rest of the year for Vistar, we are seeing more difficult comparisons, so can you just talk about expectations on how customer mix will impact gross profit dollar per case and the margin? And with CCSI, would you be willing to disclose the synergies benefit in Q1 or how we should think about that throughout the next couple quarters?

George Holm: I'll take the last one first with the CCSI.

It's been a gradual putting the 2 businesses together or folding CCSI into us. So we've been able to get good synergies. It's very difficult to quantify that, and it came over a long period of time. What I will say is, because we have less distribution centers and that is behind us, that we'll have some nice tailwinds in the current quarter and the next quarter because of that acquisition. And that will temper as we get into the fourth quarter of the year.

As far as our - what we see with our growth, as I said, our growth so far this quarter in cases is a good bit better than it was in the first quarter. And we've had some new business that's come on in the non-independent area. We also have some business that we got out of. It's only in the metro New York area, but that will clear up some space for us to do a better job in that company from an independent standpoint. As far as, well, how we see our independent growth going the rest of the year, we of course feel like we're going to improve from where we're at now.

I think part of that is dependent on how that segment itself does, but we're confident. As I said, we have people coming off no compete. That traditionally helps us. And if we could see a turnaround where our cases grow at, at least the rate that our number of line items grow, that's - those are pretty important numbers to us, then I think we'll see an uptick in our independent. But to - but it does need some help in that customer base for that to happen.

I should also add that the numbers that we get, okay, which are primarily NPD numbers, show that we're gaining share today as well as we've been gaining share when we ran those 6% to 8% case growth numbers. So it's kind of consistent with what we see in our customer base.

Chris Mandeville: And if I could just fit one last one in there. Jim, looking at the $40 million-or-so year-on-year OpEx increase, can you just help us bucket or think about orders of magnitude on how that was impacted by wages and labor and fuel and anything else, including the - I think, the $1 million hurricane impact you called out?

James Hope: Yes. Well, look, the breakout is still similar as what it was in the past, as far as ranking by area with sales and delivery and then warehouse.

And then as far as wages and labor, it's I would think of it a little more as labor and also some wage increases. I would think the hurricane - look, we have hurricanes every year. We don't make a big deal out of weather. We have to muscle through that every time, so I don't really have comments to add much on the weather part.

Operator: And your next question comes from Bill Kirk with RBC Capital Markets.

Bill Kirk: So just to clarify. The 3% to 5% organic case growth expectation, did that change in your guidance for the year?

George Holm: Did not, no.

Bill Kirk: And then on EBITDA growth, it sounds like you're expecting something similar next quarter. Within that, what are you expecting for freight and labor, specifically around the holiday period?

James Hope: Well, on the freight side, on inbound freight, we feel good about how we're managing inbound freight. Demand spikes.

It's always a little more of a battle for LTL truckers during that period of time because of the holiday season. From a labor standpoint, we've been doing this for a very long time. And during the high season time, it's a little bit of a fight for labor, but we've got a good team. We have people prepared and planned to be on shift, and we'll manage through that. I don't expect it - the trends over last year to be any different than the trends over last year - are right now.

Operator: And your next question comes from Karen Short with Barclays.

Karen Short: A couple of questions just on the reclassification. So when I look at the old way modeling with respect to Customized EBITDA and Performance Foodservice EBITDA, what we saw in 4Q was that Customized EBITDA was very strong. And Foodservice was down 5.8%, I guess, so the combined deterioration was 2%. So just looking at the new or the reclassification, obviously Customized Foodservice was down in that 5% range on a combined basis, so what I'm trying to ask is did Performance Foodservice get worse sequentially than it was in 4Q under the old definition.

James Hope: Karen, we're not commenting on Performance Foodservice or Customized separately. We've moved. As an SEC requirement, we've moved over to how we look at the businesses from a Foodservice standpoint and Vistar standpoint, so we'll have to keep our comments related to that. And I think we've disclosed those.

Karen Short: And then in terms of, obviously, consolidating the corporate offices, I just was wondering.

Why was there no change in the way you're treating Vistar's EBITDA?

James Hope: Yes...

George Holm: Yes, that, it's because it's, for the most part, a totally different business. And we don't see a potential to have savings in our corporate overhead by combining that into it. And we run it separately. It had separate leadership from Customized and Performance Foodservice, which have common leadership today.

So a lot of it is just around the SEC requirements.

James Hope: That's our key driver. It is how George looks at the businesses. And he looks at and reviews Vistar as one complete segment, including their corporate office.

Karen Short: And then last one on this, and then I had a bigger picture question.

It's have you defined how you - or have you changed how you define local case growth or independent case growth, like any above 5?

George Holm: No, we've never - yes. No, we've never made any change in how we look at that. What we consider to be an independent customer is somebody that has 4 or less units. Once they hit 5, we move them into a classification that we call regional. And no change at all to how we look at that.

Karen Short: And then I guess what I just wanted to ask about was the independent channel in general. So in September, I think what your commentary was that you thought independent doors were declining, but you thought your - I guess, share gains will come from greater share of wallet. And I guess in today's prepared remarks I thought you indicated same-store sales were declining, so is that a change from what you were seeing or feeling maybe in September?

George Holm: No. I go back to - January was the first time that we discussed that what we're seeing, now you have to take into consideration that this is our customer base and not necessarily industry, is that the number of line items that we sell to our current customer base has continued to increase. And we feel like we're doing a pretty good job of penetration of items, but what we're seeing is that the cases per line item have declined.

So from our vantage point, we look at that and we say that the same-store sales in aggregate for independent customers isn't robust today. As far as number of customers, we are continuing to grow our customer base, but information that we get that comes from third-party sources do say that the number of customers are declining, number of the independent restaurants.

Karen Short: And then last question just on Vistar. It seems like the EBITDA growth, I guess, maybe was partly a function of synergies with CCSI. And then I think you'd indicated and you've said in the past that the top line will start to lap the top line.

Should we kind of expect this similar run rate on EBITDA growth in Vistar for the next few quarters? And then on Hershey, they did announce a price increase. I guess that typically benefits you on top line but also on margins from forward-buy opportunities, so is that something we should factor in at all?

George Holm: We do - I'll try and answer them in the right order. As far as EBITDA growth within Vistar, we do see it continuing to be robust. I wouldn't say necessarily as robust as it is now for the rest of the fiscal year. As far as growth goes, they have in the month of September lapped the sales from CCSI.

And our sales growth has been better than expected once we lapped that, so we're real pleased with how we're doing there. Then as far as candy, I'll just give you what typically happens there, Karen. Is that when the increase is officially announced, we tend to see customers buy less actually. There tends to be a slight decline in sales when that happens. We tend to get a good pickup in the value of our inventory, which helps.

And then as, I guess, just the - that price increase kind of wears off with the consumer, we tend to see the volume come back within a couple months. All said, for us, candy price increase is a good thing.

Operator: And your next question comes from John Heinbockel with Guggenheim Securities.

John Heinbockel: So George, in combination with this, the consolidation of Customized and Foodservice, how do you think about the DC network? And particularly

two things: Will there be more comingling of accounts, maybe doing more independent distribution out of those Customized facilities? And then how do you think about where that DC network stands now in terms of consolidating facilities, building new ones that are bigger that can house both? How does that change?

George Holm: Well, this is - we have a customer today that we're handling partially out of Performance Foodservice, mostly out of Performance Foodservice and then partially out of Customized. This is the second time we did this.

The first time we did it, I wouldn't call it a success. We ended up moving the business back to Performance Foodservice, but we had pretty much separate management at the time and it was difficult to coordinate. That isn't the case today, the way we're structured. So I envision us, as we move forward, probably doing more of that, going to where we have the capacity and we have the availability to get the customer. We're doing some additions right now to existing Performance Foodservice facilities.

And we're building a new one, which is in Gilroy, California, Northern California. I see us continuing to add capacity where we can add capacity. I don't envision us adding any capacity to Customized today just because of the - just the lack of profitability that exists kind of within that part of our industry.

John Heinbockel: So as a follow-on to that. You would not - I assume you would not want to add Customized accounts to Foodservice facilities.

And going the other way, if you're going to add more Foodservice to a Customized facility, does that mean - the pace of culling of low-margin chain accounts, does that - does the pace go up over the next couple of years?

George Holm: Well, we went through that experience when we brought Red Lobster on, where we did a little bit of culling. We don't see us doing any of that. We've had instances this - in this past year where we couldn't get the margin that we wanted. We didn't cull the account. We just told him what it would take for us to continue to do the business, and they left on their own.

It hasn't been anyone of real significant size. I did mention in metro New York that we've exited some business, but that wasn't even the entirety of the account. I don't see that stepping up at all. I also don't see us moving business, existing business, from Performance Foodservice to Customized or the other way. It's disruptive for our customer.

Quite frankly, it's disruptive for us too. So from a customers'-facing standpoint, we don't want anything to change for existing customers. If we can't get the - either the margin or the fee that makes the account worthwhile for us, we'll make every attempt that we can make to address the profitability of the customer, but just out now culling, I don't see us doing any of that.

John Heinbockel: And then lastly, when you think about the ramp, right, of the new salespeople post non compete, how do you think this ramp - how does this differ from maybe ones in the past in terms of quality of people you've hired, tools you've given them to go to market? How does, how - will this ramp likely look very similar to prior ones, more impactful? What's your thought?

George Holm: Well, of course, we think the people that we hired was good or real good, or we wouldn't have hired them, but the only difference I would say is that there's more of them this time. So as to how they will perform versus what we've experienced in the past, we're confident.

We always have people that surprise us on the positive side and people that surprise us on the negative side, but we feel pretty confident. And we also feel like we'll get back into the proper cadence of not having a spike period of new people and not having a period where we're not bringing people on. We want to be very consistent. And then as I mentioned earlier, part of it too is just how that customer base is performing.

Operator: And your next question comes from Vincent Sinisi with Morgan Stanley.

Vincent Sinisi: I want to stay on the new hires for another minute. In terms of across the sales, delivery, warehousing, can you give us just a little more sense as are you getting them from similar industries, similar lines of businesses. And then I know kind of 4Q and the first half of this year is the heavier kind of parts of the expenses associated with it. Can you give us a sense like when some of these noncompetes are rolling off? I guess, do you think it's kind of like 3Q which will be the first period where you'll really see some optimization in terms of the operations? Or how should we think about that trajectory?

George Holm: Well, I'll address the sales area first. We're going to see some of it happening in our fiscal third quarter.

And the fiscal fourth quarter is when the majority will hit that 1-year period of time. Like I said, the sales expense comparisons will be better as we get into the third quarter and then better again as we get into the fourth quarter. And for the most part, we are hiring experienced people. We've done a little bit more of a blend of people from the industry, not necessarily foodservice salespeople than in the past when we were typically hiring people that had foodservice sales experience only. We have thrown kind of a wider net there.

When it comes to the drivers, for the most part, they aren't coming to us with foodservice experience. It's - when you get to the drivers, it's not like hiring salespeople. They - seniority is very important to them. It just isn't as easy to take them from a competitor's to us, so we're just hiring people that in most instances have a Class A CDL license. And we're doing the best job we can to train them and to retain them.

Vincent Sinisi: And then maybe just one follow-up on the independent channel. I know, George, you mentioned in your prepared comments that maybe some of the impact is coming from promotional activity from some of the larger chains. Just as a general statement, have you guys been seeing anything from your larger customers that kind of would back that up? And then I guess maybe just from what you're seeing from a line item standpoint, are you seeing any kind of changes to the menu at some of these independents more cost conscious? Or do you think this is more of just kind of a regular period that we're going through?

George Holm: Yes, I can say I really see much change in the way of the independent operator. They move pretty fast. They're pretty creative.

Just I just see some same-store sales issues from them. When it comes to the chains, we really have a very, very mixed bag. We have some people that are continuing to decline, who are trying many different things but it just isn't resonating with the customer base. We have some that are doing exceptionally well that had done exceptionally well for a while and are adding units and are really growing. And then fortunately, we have some that in the past have struggled, that are starting to show some same-store sales growth.

And it's pleasing to see, and I think we'll benefit from that. It hasn't provided us in Customized the type of sales growth that we were looking for, for sales growth at all. And that's more because we have a couple chains common ownership that unfortunately went through a bankruptcy last year, in January, and we no longer supply them. So we think that our Customized business will start doing better as we hit the month of January, but like I've said and like Jim said, we're really going to look at this as one business as we move forward. And I think another comment that I should make that I made before, but if you go back to when we put Vistar Roma PFG together, Customized was 28% of the EBITDA of the business.

And last year, it was 8%, so it's not something that's extremely material to us. We're still very dedicated to the business. We're just looking for ways that we can get costs down without affecting our customer in any way.

Operator: And your next question comes from Judah Frommer with Credit Suisse.

Judah Frommer: Maybe just going back to the competitive landscape within the restaurant industry.

I mean you're not the only distributor in the last week to kind of voice some concern or some potential slowdown in independent restaurant land. I mean, is there a concern that people are just not opening restaurants? Or are they not able to compete as well with chains? Is there some consumer taste change? And then can you tie that into just having taken on a lot of salespeople and the potential for the independent segment just slowing down in general?

George Holm: Yes. I mean that's a big question. And we're - it's a very large industry and we're only #3 in it, so we have a certain look in what we see. And then we get information that comes in from third parties.

And it's fairly mixed, the information that we get. I'll just go back to what we see today from our customer base is that the same-store purchases, if you will, aren't what they were before. And if you look at industry data, it shows that there is sales growth but there's not traffic growth. And for us, sales growth at the customer level that is achieved through price increases doesn't change our picture at all. So I don't know that we are qualified or competent even to say that there's a slowdown in the independent business, but what we can say is that we're adding people.

We're adding customers. We're extremely focused on the business, and we're doing well and we're gaining share. We have large competitors that are also doing well. So I don't see anything changing for us in the future. We still have that stated goal of running 6% to 10% case growth.

It's been a while since we've seen 10%. We've had quarters before where 6% achievement was difficult. We just went through one of those quarters. We've seen it continue into this next quarter but no decline. I mean we're continuing to do what we perceive to be well.

And we feel that - as we get deeper into the year, that we should be able to get ourselves back to that 6% level, but I will state that we got to have a healthy industry to do that.

Judah Frommer: And just to follow up

on that: I mean we always talk about how fragmented the industry is. I mean, if things do slow down - or are there already any indications of smaller competitors going away? Or is it kind of business as usual and everybody is just trying to take their fair share of the pie?

George Holm: I think it's business as usual.

Operator: And your next question comes from Andrew Wolf with Loop Capital Markets.

Andrew Wolf: So on the independent, case growth is slowing from 6% to below under 5%, it sounds like.

Was that just sort of noise in July? Or did - or is - the sort of same-store sales, did it worsen from that period, from July?

George Holm: I think it's always hard to tell with 1 month, Andy, but I do believe there was some benefit from the calendar, the way July 4 spelled because we had an exceptional first week of fiscal July, as far as comparison goes. And I think what it's shown us is we just got to be real careful to comment on a month, but we are still dedicated to this 6% number for a year. That's still our objective. And as we've given you guidance on our EBITDA growth, that guidance takes into account continuing about where we're at. And we feel that - through the year that our total case growth is going to be quite consistent.

Andrew Wolf: And are you saying the guidance is built on staying around 5%, not going up to 6%...

George Holm: That's correct. That's correct.

Andrew Wolf: And can you comment somewhat quantitatively on what - as the sales folks cycle in and based on like historical norms and what kind of productivity they bring, what terms are there known to be trailing off and stuff, what I should add to case growth if historical patterns were to hold?

George Holm: I just think that's a hard thing to comment on. I'll just go back to we have a high level of commitment to getting to 6% case growth, and we think that we have staffed ourselves properly to do that and that we need to make sure that we have the driver force to accomplish that as well.

And I would go so far as to say that in today's world, what we're dealing with right now, it is much harder to find a good driver than it is to find a good salesperson.

Andrew Wolf: Interesting. So are you - where are you at with driver capacity? Are you actually kind of in the river that has more drivers than you need now as you wait for this? Or are you just adequately staffed?

George Holm: We do not have enough drivers. I mentioned earlier that overtime is not as important to a driver as it used to be, and I feel that we need more drivers so that we can reduce that level of overtime.

Andrew Wolf: And then one last thing, as - so it appears pretty, with wages where they are and with labor being so tight, that there's sort of a permanent shift up in the cost structure for everybody, the pick-and-deliver groceries, especially with the lack of inflation.

It appears to me that some of the distributors who have sort of almost right-sized their customer lists are doing a little better because more customers become incrementally less profitable. Is that something you guys are looking at? Or is it just not in your DNA to kind of run the business that way?

George Holm: We're certainly looking at that. And as I stated earlier, we're not in the business of culling customers. It's really not something that we like to do, but as contracts have ended and we've priced it based on what we think our current cost levels are, we have lost some business doing that. And that's reality for us moving forward as well.

We've done a great job of growing our margin with this higher-expense growth. And the bulk of that has come through the change in mix of business, and it's been that way for us for years. And I stated this at the last call. After the quarter that we just reported now, we do expect to see good results. We're committed to our guidance of 7% to 10%, but we expect to see that with not as much gross margin growth as you've seen from us in the last several quarters but also not the same increase in operating expense margins that you've seen from us in the last several quarters.

Operator: And your next question comes from Ajay Jain with Pivotal Research Group.

Ajay Jain: I wanted to just go back. Three months ago, when you reported the fourth quarter results, the cost pressure seemed really specific to the - I guess, the former PFS segment. And now that you've got the consolidated reporting structure, I just wanted to ask. With the new Foodservice segment, was there a big difference in the performance of multiunit accounts versus the traditional broadline customers both in terms of just general operating performance and year-over-year profitability? Can you talk about the variability within Foodservice based on customer type?

James Hope: Yes.

Look, you need drivers and warehouse workers to service both types of customers in all those channels, so there's not a big difference between the two from that standpoint. Cost pressures exist in both areas, but we feel like the cost pressures are very manageable. And we're confident in our game plan.

Ajay Jain: And I guess I wasn't clear on how incremental the investment in salespeople and in warehouse and delivery workers, how incremental that was in Q1. Was the EBITDA decline in the Foodservice segment more a function of the previous investments you were making in Q4 and for which you just had kind of a lag time to get leverage? Or was there a similar rate of spending on staffing in Q1 which would have been incremental to Q4? I'm just - I'm assuming that there was incremental hiring, but I just want to confirm that and confirm how...

James Hope: No, you're right. In our - in that broadline business, as we said before, we had staffed up and made some heavy investments there. And there's a lag time on when the productivity comes around for the salespeople. And we're staffing, as you know, as we've discussed multiple times, in the delivery and the warehouse area.

Ajay Jain: And just finally, if you

can comment: I'm trying to figure out how much of the decline in EBITDA for Foodservice was completely planned and contemplated when you gave the preliminary guidance a few months ago; and to what extent it was impacted at all by changes in market conditions or the softer comps, for example, at independents, if you can comment.

James Hope: Yes, I want to be thoughtful about that answer. I think the way I'll leave it with you is we feel confident in our 7% to 10% adjusted EBITDA guidance. And I'll leave it at that.

Operator: And your next question comes from Bob Summers with Buckingham.

Bob Summers: I just wanted to dig into a couple of things.

I think that a comment was made about growing cases with less expense. Can you maybe provide a little more texture around that? And I guess the way that I'm thinking about it is on a case growth adjusted basis, so if I think about the spread between expense growth and case growth, what range should we be targeting?

James Hope: You know what, I don't have a range to give you right now other than the delta that we see today. We would not expect that delta to extend. We're working very hard to make sure that we tighten the range that exists today up. And that's why we have a little higher expectations for the back half of the year than we have on the front half.

Bob Summers: And then back to this Customized and how it fits as well in this consolidated framework. And I know that you've said multiple times that you're not going to intentionally cull customers, but now that it arguably is in a position where it has to compete for labor, for capital, for resources; and while it's you said 8% of EBITDA, it's significantly higher than that from a case growth or a case load perspective, so your - now as you think about the higher sweating your distribution assets in that business, I mean, doesn't - shouldn't the evolution be able to put it under more of a microscope?

George Holm: Well, we have everything under a microscope. We're committed to that business, and we're committed to that customer base. We've not invested in brick and mortar. I think we did one addition, and it's all we've done, in a 10-year period of time to that business.

So we're very aware of how difficult the industry is, but we do feel good about it for the long term. We don't necessarily feel good enough to invest in brick and mortar for that business. We do feel that - by combining the two and utilizing some capacity that we have available in other areas, that we'll be able to grow the chain business in a more profitable way. I think that's going to be a real help for us. We invested very heavily two years ago in Vistar.

And it cost us a couple difficult quarters for Vistar, but they were good investments that we made. I feel like we've done the same thing the last couple quarters in Performance Foodservice. We've invested pretty heavily for - from a people standpoint and additions right now. And I think we're going to get that same type of benefit. If I felt that we could make some investments in Customized which would pay off in two quarters, three quarters, one year, whatever, we would do that as well.

We just don't feel that's the case today, but we do want to continue to grow our business. And we think the way in which we're structured today from a management standpoint, from a facility standpoint and the ability to get a better corporate overhead kind of profile, we think we're headed in the right direction.

Bob Summers: And then last one. And I think that we hit different components of this today, but as I think about case line growth; and think about sort of three different buckets within that being same-account growth, growth that stems from new doors, new restaurants and the third being new accounts but are preexisting restaurants, can you just kind of give us a feel for what that composition looks like and what you're expecting to - it to look like going forward? Because I think that, a lot of times, too much is made of new restaurant growth and how it impacts the industry. And with adding salespeople, I would think that maybe, for you going forward, you get more from preexisting restaurants that you haven't previously penetrated.

George Holm: Yes. And you're talking about independent, right, I'm assuming?

Bob Summers: Yes, yes, exactly.

George Holm: Yes, we follow very closely how much of our business is new business; new accounts; how much of it, the decline, is lost business; and then what our penetration numbers are. And what we're seeing there is that we're adding new business at not quite the rate we were when we were running that 6% or better. We are doing a better job on the lost business than we were doing before.

And our penetration has been more difficult than it's been before from a dollar standpoint even though we're continuing to penetrate lines. And you just put all that together, and a little over a point in growth kind of went away. And I do believe, coming off it, that we do need to continue to make sure that we're expanding our customer base and continue to get better at hanging onto our existing customers.

Operator: And your final question will come from Kelly Bania with BMO Capital.

Kelly Bania: Just wanted to ask a slight nuance question just with the commentary about the first half of mid-single digit versus low to mid prior.

I guess, what was the change there? Is there any shift in expenses? Is it just a little strength in Vistar? And just maybe talk about, if that kind of continues, your thought process on maybe reinvesting some of that, maybe stronger performance or letting that flow through as the year progresses.

James Hope: Yes, Kelly, I'll take the first half, and then George can answer and handle the Vistar comment. On the guidance or outlook we've provided, we changed from low to mid to mid primarily because we have the first quarter under our belt. And we know how the first 6 months could - would mostly look, and so we feel confident changing the wording to mid-single-digit range. Then as far as Vistar...

George Holm: Yes. With Vistar, like I said, we lapped the CCSI and we found that our sales growth momentum was better than we expect it to be when we lap that. That gave us some confidence. Sequentially, we're improving in our Performance Foodservice. Believe it or not, we spent a whole lot of time on whether we had that word in that narrative.

It's not any more complicated than that. And the only variable for us with Vistar is that, last year, December was an excellent theater month. We don't know that that's going to replicate itself, maybe not to that degree, but we feel like we've got enough sales momentum that that's probably the biggest reason that we don't see a low single digit in our future here.

Kelly Bania: And just maybe a question on the new business you're taking on, I guess. It sounds like in Customized or on the chain side.

Can you just talk about generally how the margin profile is of new business these days relative to your existing margin structure and if that's still kind of heading in a more positive direction than maybe several years ago?

George Holm: Well, for us, what we're finding is that - as we roll-off a contract, that we're typically able to get somewhat of an increase in our fee. We're finding that new customers have a willingness to give a better fee, provided everything else is in place and you're doing the right things on an inbound standpoint for them. And we have found that - as some contracts end and we put in a somewhat higher program, that the business just goes away. And the irony for us has been it's been the lower-volume customer that has gone away, not the higher-volume customer.

Kelly Bania: And then last one for me, just talking about the line items increasing at a faster pace than cases with the independent customer, generally speaking.

What are you seeing there? Is that private label that's helping to increase that penetration, or specialty, or just a strong sales force working to increase that penetration? And as you look at your share of what you service for your independent customer, what share do you think you have of that right now? And how that could shape over the next several years.

George Holm: Yes, Kelly, I want to start out by just saying again that this is our customer base and what we're seeing within our existing customer base. And we've always lived by this assumption that - if we continue to add items, add line items, to that customer, that we're going to grow within that customer. And that's held pretty good for us most of the time, other than when we went through that Great Recession. And that's not happening for us today.

Our growth requires us to get fairly significant - well, it's - requires more line item growth than it has in the past at the existing customer level. As far as what percentage we have of the customer varies tremendously for us. We have some very large broadline companies that we have the type of SKU base, that we have a very high share of existing customers. And we have kind of legacy Roma companies or just companies that were part of Performance Food Group that weren't real large, and we tend to be more the backup customer in those accounts. So it really varies, but what doesn't vary is the goal is to get more of that customer's business no matter how much whether we're the backup or whether we're the primary supplier to that customer.

Operator: And thank you. I would now like to turn the call back over to Michael Neese for any closing comments.

Michael Neese: Thank you, Bridget. We appreciate your interest in Performance Food Group. We look forward to seeing many of you at next week's Morgan Stanley conference.

Have a great day.

Operator: And thank you. This does conclude today's conference call. You may now disconnect your lines.