Disclaimer: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.:

Operator: 0:04 Good day, and welcome to PFG's Fiscal Year Q2 2022 Earnings Conference Call. I would now like to turn the call over to Bill Marshall, Vice President, Investor Relations for PFG. Please go ahead, sir.

Bill Marshall: 0:28 Thank you, and good morning. We're here with George Holm, PFG's CEO; and Jim Hope, PFG's CFO. We issued a press release regarding our 2022 fiscal second quarter and six-month results this morning, 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 same period in our fiscal 2021 fiscal second quarter. 0:54 Additionally, occasionally during our call today, as noted, we are comparing results to the same period in our 2020 fiscal second quarter.

The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found at the back of the earnings release. 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. 1:32 Now I'd like to turn the call over to George.

George Holm: 1:35 Thanks, Bill. Good morning, everyone, and thank you for joining our call today. I'm pleased to be able to share PFG's outstanding second quarter results and discuss our strategic goals and objectives. We had another active quarter which included the announcement of a new management structure, continued integration of Core-Mark and the Foodservice acquisition in the Southeastern US. I will address each of these items in turn and provide additional color on the direction of our company and where we are headed.

2:07 Last quarter, we discussed our vision to transform PFG beyond a traditional foodservice distributor into a leader across a variety of channels and product offerings. During the past few months, we have aligned our operating management and report structures with this vision. We believe this new structure will increase our speed and agility capturing new lines of business and our cross-selling capabilities. We have already seen the cross-selling between foodservice and convenience bear fruit, which I will discuss in more detail shortly. 2:41 As you saw in this morning's earnings release, we have also realigned our reporting segments to reflect our strategy and management structure.

We will now report

3 segments: Foodservice, Convenience and Vistar. The Convenience segment includes all the business that came with Eby-Brown and Core-Mark acquisitions. The Vistar segment will reflect the legacy Vistar channels, including theater, vending, office coffee, retail value stores and corrections. There were no changes to our Foodservice segment. This new reporting structure not only aligns our organization with our strategic vision but also gives our investors additional financial information and a deeper look into business trends across different units.

3:28 One of the units is our combined convenience store distribution operations. This includes the Core-Mark organization, which we acquired in September of last year and the Eby-Brown business, which we acquired almost three years ago. Over the past five months, these two entities have worked quickly to come together as united front, our efforts to build upon their combined strengths in the convenience store space. As we discussed on our last earnings call, we're off to a fast start with quick business wins across traditional convenience business as well as foodservice into convenience. 4:05 Today, I can announce that we are in discussions with several additional customers to bring new business in this space.

When we announced the Core-Mark acquisition, we had very high expectations for the value we would create by bringing that business to PFG. I am pleased to say our expectations are being realized and the future looks very bright. This could not be possible without the dedication and hard work of so many talented associates and a strong management team, including those who are new to the organization from Core-Mark as well as our Eby colleagues. The two teams have come together to form a cohesive unit and as we had expected, have proven to be an excellent cultural fit. The integration has gone smoothly, and we're ahead of schedule in several areas, including finance, procurement, HR and IT.

4:59 The story is very similar to our success with Reinhart, which we are familiar with. On many occasions, you have heard me speak about our excitement with Reinhart. I'm pleased to say that our enthusiasm remains high. Last quarter, we highlighted the pace of independent growth that Reinhart has experienced, which has continued to outpace the strong results from our legacy Performance Foodservice business. 5:04 Today, I would like to highlight another encouraging aspect of the success with Reinhart.

Our success in foodservice is driven by many initiatives. However, 1 of the most important elements of the strategy is growth of our PFG Performance brands within the independent segment. These high-quality brands are important for our customers as they provide a differentiated offering at a reasonable price. It's also important for PFG as it separates us from the competition and comes at a higher margin per case than the national brands. 5:59 Our Performance brands today represent a significant portion of all cases sold to independent restaurants.

And while we are seeing success across the company, this is another area where Reinhart is growing faster than the legacy business. It is rewarding to see our strategy play out and inspires us to continue along the growth path. We also added to our Foodservice business with the acquisition of Merchants Foodservice at the end of the quarter. Merchants adds to our food service scale and reach, filling in space in the Southeastern United States. We are not providing financial details of the transaction, but historically, Merchants has operated at an EBITDA margin that would be accretive.

6:44 We are excited to welcome the Merchants' associates to the PFG family and look forward to many years of success. Altogether, our foodservice business is executing at a very high level. Our performance in the independent channel continues to drive our overall segment results. In fact, our market share gains in the independent channel accelerated sequentially from the first quarter to the second quarter compared to 2 years ago. This included strength in the pizza, Italian, Hispanic and seafood concepts.

We are very pleased to see our momentum in foodservice continue, particularly in independent restaurants. Finally, let me comment on our Vistar business before turning it over to Jim, who will provide color on our results and financial position. As you know, Vistar's channels were some of the hardest hit areas over the past 2 years, including significant impact to theater and office cost. 7:39 I cannot speak highly enough about the effort this organization has put into achieving these results. There are many bright spots at Vistar, including the areas of retail, corrections and travel, all of which experienced second quarter 2022 net sales above 2020 levels.

We are also very encouraged by the recent trends in the movie theater channel. While that business is still below levels of two years ago, it experienced significant improvement sequentially, along with a strong box office showing late in the calendar year. While January and February may not see the same level of box office product, we expect the strength to resume in the spring and early summer seasons. 8:26 In summary, we have remained active in the pursuit of building upon our strength as a food and food service distribution leader. Our underlying path to success is simple.

It starts with our customers and a relentless focus on helping them succeed. This has resulted in significant sales growth, particularly within high-margin channels and product categories. 8:49 We seek to keep our organization lean and use operating efficiencies to grow EBITDA faster than sales and expand our margins. We then look to reinvest these profits back into the business to produce a sustained cycle of organic growth and for opportunistic M&A. We intend to tightly manage our working capital to generate long-term free cash flow with the goal of generating high shareholder returns.

9:16 I'll now turn it over to Jim for an update on our fiscal second quarter and financial position.

James Hope: 9:24 Thank you, George, and good morning, everyone. As George mentioned, we are very pleased with how our business has performed. Our associates have stepped up to the challenges and they continue to deliver for PFG and our customers. Our organization has thrived during the last two years, and we've taken advantage of multiple opportunities.

We have reached the point where we have turned our attention to producing sizable sales and profit growth. Our financial position supports the investments we believe will produce these strong results. Let me provide an overview of how we stand financially before a quick review of our second quarter results. 10:03 I will then finish with our guidance for the third quarter and full year and the assumptions and expectations within those forecasts. We ended the quarter with $2.3 billion of total liquidity.

Our liquidity position reflects the acquisition of Merchants, which we financed with our ABL and closed on December 31. While there's no financial results from Merchants to report on our income statement, the balance sheet and cash flow statement fully reflects the addition of that business in the final days of the fiscal quarter. 10:38 Turning to cash flow. In the first 6 months of fiscal 2022, we generated approximately $154 million of operating cash flow. The team continues to do a fantastic job managing our working capital position overall and the uptick in inventory in the quarter was a planned use of cash and the result of building consumer packaged goods inventory ahead of anticipated price increases.

I'll talk more about the CPG procurement activity. and the impact on our financial results in a moment. 11:12 PFG invested $68.5 million of capital expenditures over the first six months of the year, resulting in positive free cash flow of $85.3 million. And with that, let's quickly review some highlights from our fiscal second quarter business performance. As George mentioned earlier, we have adjusted our reporting structure to align with management changes made in December.

And going forward, we will report these

three segments: Foodservice, Convenience and Vistar. Vistar represents the non-Convenience channels within the prior Vistar segment, while our new segment Convenience includes the Eby-Brown and Core-Mark operations. 11:59 At an enterprise level, net sales increased 87.6% in the quarter to $12.8 billion, driven by a full quarter of Core-Mark's sales results in addition to inflation-driven pricing and a continued recovery in the business environment. Total case volume increased approximately 40% in the second quarter and was up 15.5%, excluding the contribution from Core-Mark. 12:26 As a reminder, the high selling price of tobacco products in addition to high rates of inflation impact the difference between case volume increases and our top line growth.

Independent cases increased 21% in the fiscal second quarter as we continue to see solid momentum in our independent business. Total PFG gross profit increased 57.7% compared to the prior year quarter, including the addition of the Core-Mark business and the independent case growth, which I just mentioned. Core-Mark contributed $245.2 million to gross profit. 13:06 Food cost inflation continued to move higher in the quarter. Our weighted food cost inflation was about 12.5%, up sequentially as we continued to experience double-digit increases in our foodservice commodities, including seafood, meat, poultry, eggs and grocery.

The rate of inflation was sequentially higher in the second quarter compared to the first quarter across each business segment. However, Vistar and Convenience inflation remains below that seen in the more commodity heavy foodservice segment. 13:42 With that said, we have continued to successfully pass along these increases. Gross profit per case was up over $0.66 in the second quarter compared to the prior year period, including the acquisition of Core-Mark, which contributed approximately $0.12 per case. We have continued to make progress on the labor front and our efforts to reduce temporary and contract workers.

As we disclosed in the press release this morning, our temporary contract labor costs increased $34 million compared to the prior year period, an $18 million improvement from the first quarter increase. The $34 million includes both direct contract labor costs and associated travel costs. As we discussed last quarter, we will not see the full benefit of those cost reductions immediately as the reduction in temporary workers is largely replaced by full-time associates. 14:40 However, over time, we should realize savings from these initiatives as full-time worker productivity improves. We remain optimistic that the labor situation is headed in the right direction, and we expect to be in a much better position by the end of the fiscal year.

In the second quarter, PFG has reported net income of $8.4 million. Adjusted EBITDA increased 52.6% to $241.1 million. Diluted earnings per share was $0.05 in the second quarter, while adjusted diluted earnings per share was $0.57, an increase of 62.9% year-over-year. 15:25 Let's close with our outlook for the remainder of fiscal 2022. As we have discussed, we had a very strong second quarter with net sales coming in at the high end of our expectations and adjusted EBITDA better than anticipated.

The better-than-forecast adjusted EBITDA was a result of strong underlying business fundamentals, a slightly better-than-expected labor market and procurement gains in several consumer packaged goods categories. 15:55 We are increasing our full year outlook to incorporate the better business trends. We expect third quarter net sales to be in a range of $12.9 billion to $13.1 billion. Adjusted EBITDA for the third quarter is anticipated to be within a $220 million to $230 million range. For the full year 2022, we look for total net sales to be in a $50 billion to $51 billion range, a $500 million increase from our prior outlook.

For adjusted EBITDA, we anticipate a $970 million to $990 million range, an increase of $30 million on both the bottom and the top end compared to our prior guidance. Our guidance assumes a slow but steady improvement in the labor market and efficiency gains from full-time workers to accelerate in the fourth quarter of the fiscal year. 16:57 We have also included a small benefit for the six months we will own Merchants in the fiscal year. In summary, we are extremely pleased with the first half of our fiscal year. We posted a strong quarter, which has fueled optimism for the back half of the year.

This is reflected in the increase to our full year guidance ranges, both on the top line as well as profit. Our company is positioned to build upon our momentum, driven by our constant focus on our existing customer base while adding high-profit new accounts across channels. 17:30 The Core-Mark integration has proceeded very well, both culturally and from a business perspective. We expect these initiatives to produce sales growth ahead of the industry average and long-term margin expansion. Our balance sheet is strong, which we believe gives our company the flexibility to invest in value-creating projects to drive organic growth.

Associates across our organization have been working tirelessly to improve business results, and at the same time, they're making PFG a fantastic place to work through their dedication to each other and those we serve. We appreciate your interest in Performance Food Group. 18:13 And with that, we'd be happy to take your questions.

Operator: 18:17 We'll take a question from Mark Carden of UBS.

Mark Carden: 18:37 Good morning.

Thank you for taking my question. So overall, it sounds like your efforts to grow your workforce are progressing quite nicely. When you think about your more permanent workforce, are you expecting structural wage pressures to be any steeper than what you may have expected three months ago? Or are you starting to see some stabilization there?

James Hope: 18:56 Yes, this is Jim. No, I don't expect them to be any steeper than we saw three months ago. We've done a whole lot of work, I'd say, appropriate work to get wages right market by market and make sure that we've done what we need to do to be able to recruit the right people.

I really think now it's about given the new folks that we brought into our workforce time to learn the process, be trained and start to see some good solid productivity improvements. So we feel good about where we're headed. We've got good work to do, and I think we'll -- those things will all pay off.

Mark Carden: 19:30 Great. And then as a follow-up, how impactful has Omicron been to your business? And how does it compare to what you saw with Delta? And then related to that, how has it impacted your staffing both in 2Q and 3Q to date?

George Holm: 19:44 Yes, I would say that through the delta period of time, it probably had maybe a little less impact on labor and maybe a little bit less impact as well on the marketplace.

But the Omicron is so quick. And what we saw was a good deal of absenteeism because of sickness. But fortunately, they were getting back faster also than before. And that helped to alleviate it. Also, it helped that it came in January, which is a lower volume time of year anyway.

Mark Carden: 20:30 Great. Thank you so much guys.

Operator: 20:34 We'll take our next question from Alex Slagle of Jefferies. AlexSlagle: 20:40 Thanks. Good morning.

Great to see things coming together, so weathering the storm. I was curious if you could provide some more color on how the foodservice sales within the convenience channel have trended recently more broadly and for you directly as we've kind of been progressed through this Omicron and emerge back to normalcy in some parts.

George Holm: 21:08 Well, we've seen a good surge in our foodservice business and the Convenience just really led by a couple of accounts. We still have a good bit of work to do. I did here from Scott McPherson that runs our convenience area that actually January was the highest increase in nontobacco sales for Core-Mark that he can remember, and he's been there close to 30 years.

So it's going well. We just have a lot of work to do to get it where we need to go. AlexSlagle: 21:45 Okay. And the Core-Mark. I mean, anything surprising you about the integration and the business as you've had some more time to see them gel together with legacy businesses and see it an action.

I know your initial thoughts were fairly positive, but curious if you've learned anything new or got any more color on that?

George Holm: 22:09 Well, culturally, they're doing really well. The two companies have come together with very few issues. And then unlike with Reinhart where there were probably more differences, certainly more product differences, we've been able to get the integration around HR, finance, procurement faster than we were able to do that with Reinhart where we really needed to take a little bit more care So we're very pleased, and we're also very pleased just with the staffing and the management at Core-Mark.

Alex Slagle: 22:48 Got it. And follow-up for Jim, on whether on the productivity commentary that you provided earlier.

I know that's definitely pressure. I don't know if you have anything on the magnitude of that impact, how we should think about that as we're building out our models.

James Hope: 23:08 I think it'd probably be as anyone would expect when you bring a large number of new people into the supply chain, there's -- we follow a lot of process. There's good discipline. We want everybody to work safe and be productive.

And I think it's learning the process is what I'm talking about, that takes some time. We are right on track. I would say that I'm really pleased with how our supply chain leadership all the way down to supervisors on the dock and our truck drivers are doing. It's – I think the magnitude comment would be more about time that we're on track, and that was all contemplated in the guidance we provided.

Alex Slagle: 23:49 Thank you very much.

Operator: 23:54 We'll take our next question from Edward Kelly of Wells Fargo.

Edward Kelly: 24:00 Hi, good morning, George and Jim, everybody. Congrats on a really solid quarter here. I wanted to ask you first, just a follow-up on the labor cost side. This is labor inflation generally right, is something that I think we've heard a lot of concern about from the investor base.

We heard from one of your big competitors yesterday that they just don't believe underlying labor inflation is going to be that bad. But that doesn't really seem to jive with sort of like what you hear about, warehouse worker pay, driver pay, etc. And my question for you is, what are you seeing if we sort of like, forget about the temporary costs. But underneath of that, like what are you seeing from a wage inflation standpoint, in your workforce, how does that compare to what it has been historically? And where do you see that going? Like is this a headwind that we should be concerned about?

James Hope: 25:00 Yes. So Ed, thanks for the question.

We have said all along that some of this would be structural and some of the increase would be transitory. We've never thought it would all eventually go away. And clearly, that's going to be the case. We think it's manageable. We think we found the right balance in how we pay our folks in our supply chain.

I think the best way to quantify it for you is how we feel about it has been specifically quantified in our guidance and that's what informed our guidance. I'm not at a spot where I'd put out a number right now, but I think we've seen most of it, and we've absorbed it. But at the end of the day, we're going to keep up with where we need to be to make sure we're able to recruit, hire and retain good solid folks to work for PFG, and we're doing that right now.

Edward Kelly: 25:59 Okay. And then I wanted to ask you about fill rates and where you stand currently with fill rates, particularly as we look to getting into what I think we all hope will be a very strong sort of spring summer period.

Do you think the industry will remain challenged during this period? And do you think that you're in a position where you can continue to accelerate share gain during this period if the opportunity arises?

George Holm: 26:31 Yes, Ed, this is George. Of course, we always think we can continue to increase our share. We're seeing in the foodservice part of our business the inbound fill rates continue to get better. And it's been great to see. We're doing particularly well with the center of the plate, and we're well into the 90% for inbound fill rates.

When you get to our Convenience business and our Vistar business and more with CPG companies, I guess, I would say, we're not seeing much in the way of improvement yet. And all we can give for guidance with that is what we're being told. And what we're being told is that it will gradually get better, but it's going to be around for a while, the shortages.

Edward Kelly: 27:28 I guess I was really kind of asking, George, about your outbound rates. And where you stand from a like, yes, a labor perspective? And if we're going to have a good strong spring, summer, are you ready than others, I guess that's really where I was kind of asking.

George Holm: 27:47 Okay. Yes. As far as our outbound fill rates, they continue to improve. A little hard to track in our Convenience and Vistar business because customers will continue to order the same items that that aren't available. So it's hard to tell, but our Foodservice is definitely improving.

And as far as from a labor standpoint to be ready, we continue to hire. We continue to train. We continue to see the turnover reduce, I guess, more of the churn reduced than the turnover. We don't really have an issue with longer-term employees. It was more around churn.

And the biggest thing that we see is continued reduction in our dependency on temporary workers. That's been tough. You don't get the same commitment and quality from a temporary employee that you get from a full-time person.

Edward Kelly: 28:52 Great. Thanks, guys.

George Holm: 28:56 Thanks, Ed.

Operator: 28:58 We'll take our next question from Jeffrey Bernstein of Barclays.

Jeffrey Bernstein: 29:04 Great. Thank you very much. I have two questions.

One, just wondering if you could talk a little bit about market share gains, maybe your perspective on Performance Food versus the industry. stripping out the obvious M&A. But I think you mentioned independents, maybe market share accelerated. I'm just wondering, is that more from adding new accounts? Or is it further penetrating existing accounts, any big differential between change versus independent? How do you think about your market share, whether it’s recent your goal?

George Holm: 29:37 Yes. As far as share, we really only have one reporting that we get.

That certainly has all the broad liners in it, not much in the specialty area. But we've done what we consider to be a great job of continuing to gain share and over months where we had gained a good bit of share last year. Our independent is really – within foodservice has driven all of our growth. We actually have been running behind the previous year in our chain business. We have a very large funnel in our chain business.

But as we're determining kind of what our costs are going to be moving forward, we've been cautious there. 30:27 Sequentially, from fiscal Q1 to fiscal Q2, our growth got better for independent. And we're actually in a position now where all of our Performance Foodservice distribution centers are running above two years ago in independent case sales and much above in dollar sales because of the inflation that we're dealing with.

Jeffrey Bernstein: 30:56 Understood. That's encouraging.

And my other question is just -- and George, now that you do have three distinct operating segments, I guess, investors have to digest that. But how do you think about the long-term opportunity set for each, maybe the growth for each relative to kind of the overall Performance Food Group or which segments have the greatest opportunity, whether it's M&A or just more organic?

George Holm: 31:20 Well, our greatest opportunity sits in our largest area, and that's the Performance Foodservice, particularly with independent. Like I said, we've got some things to figure out with our chain business. But our independent continues to do well, and we don't see anything that would cause that to slow down. Vistar has two channels, in particular, that have not come back yet, and that's theater and office coffee.

And I would call our value stores as somewhat challenged as well from a cost-to-serve standpoint. So great future there. I would say our three retail automated facilities where we do a good bit of retail and we do a good bit of Internet fulfillment are doing just fantastic. 32:11 I mean the improvement has been just great to watch. So I feel great about the future with Vistar.

And Convenience, we talk a lot about convenience foodservice, and I feel that we're off to a great start, and we're going to do well there. But the biggest opportunity is still the Convenience business. I mean I think we're positioned well for it where it's got good synergies from a procurement standpoint with Vistar. And we have a robust funnel there as well. And we have new business that's coming on board in this quarter and in our fiscal fourth quarter that will be very helpful to the core business of Core-Mark.

Jeffrey Bernstein: 33:03 Understood. Thank you very much.

George Holm: 33:05 Thanks.

Operator: 33:09 We'll take our next question from John Heinbockel of Guggenheim.

John Heinbockel: 33:13 George, I want to start by drilling into the Core-Mark pipeline, right, that you referenced? The bulk of that large multiyear contract business, right, as opposed to the independents, can you dimensionalize the size of that? Could that add 5% or 10% to the locations that Core-Mark serves? And then if it is the large piece, the large multiyear contract accounts, how much roughly – how much would you be giving away in margin price? Is that -- or is that margin pretty close, right, because the drop size is pretty close to an independent.

George Holm: 33:54 Well, yes, what I would say is that the independent is where we're growing the fastest and by a significant amount. And that's within both within Eby and Core-Mark and Eby has been doing that for a couple of years, and it's accelerating right now within Core-Mark. I give our people a great deal of credit with that. That is our focus. Then the new business that we have in the Core-Mark that's more sizable.

One is a little bit under $0.25 billion a year, a traditional mix, maybe a little heavy tobacco. And the other one is in excess of $100 million a year and has potential beyond that. So it's about a $17 billion business. So it takes a lot to move the needle. But those two will help us move the needle.

But the biggest thing is that we continue to grow that independent.

John Heinbockel: 34:58 And then secondly, one of the comments I think you made recently, or last quarter was that you were not as aggressively looking for new business on the foodservice side because you were concerned about service levels. right? You don't want to disappoint. Have we gotten past that where you've ratcheted up the aggressive pursuit of new accounts in foodservice?

George Holm: 35:21 Definitely on the independent front. Like I said, when it comes to the chain, we've got a big pipeline.

I would suspect everybody in the industry has got a big pipeline as with all disappointed customers. But the independent, we're going to be as aggressive as ever.

John Heinbockel: 35:43 Okay. Thank you.

George Holm: 35:46 Thanks, John.

Operator: 35:48 We'll take our next question from Lauren Silberman of Credit Suisse.

Lauren Silberman: 35:54 Thank you very much. So just first on pricing power. Can you talk about your confidence in pricing power and being able to push through the installation and remind us what you're generally comfortable pushing through in a normalized environment? And should we see a more challenging consumer backdrop? What are your expectations in your ability to push price? And then sorry, related to prior question follow-up, have you been able to price to cover underlying wage rate increases?

George Holm: 36:23 Well, we've – with this, what I would call, excessive inflation, we've done a great job of passing that on in the independent area, surprisingly. So we're not comfortable with this type of inflation, and we don't like to see that for our customers.

We just don't. It's a lot for them to deal with, and we continue to encourage them to raise their menu prices, and most are doing that. They're also pretty true as to how they price and specials they run and what items to use. So that part of our business has gone well. When you get to the chain business, a lot of it is fee-based.

We certainly have seen, no secret that labor is high. As Jim mentioned, some of it is transitory, but some of it is not. So we've had parts of our business there where we've been able to get that through even when we were under a contract, and we've had some that have been extremely resistant. And that's just our job to manage our way through that. But that story hasn't ended yet.

It's one of the things that makes me feel real good about where we situated today because that part of our business, that national chain business is tough. And distribution centers where that's all we do, we are really having a tough go, and we've been able to overcome that as a company. And I do feel that labor is going to get back to a more normal state once we get through this past -- this last variant and high hopes that we'll be able to reach agreement with our customers as to what's fair.

Lauren Silberman: 38:18 Great. Thank you for that.

And then you called out an increase in our Foodservice gross profit per case, driven by favorable mix shift, independence and private label. Can you talk about where your mix is with performance brand and how you think about the biggest opportunities to increase that going forward? Is it awareness, expanding the portfolio of options or is it primarily just growing independent .

George Holm: 38:43 Within our independent, we've had several weeks where we've gone over 50% our brand. It's something we always wanted to get to. And quite frankly, I will admit, I didn't think we'd get there by now.

And then a bright spot with it is Reinhart, where we adopted many of their brands. We've kind of learned going through this process where those brands fit and where we need to get in legacy Performance brands to get us where we need to be, maybe from a quality standpoint or from a pricing standpoint. And we've left that for our Reinhart people in the field to make those decisions with a lot of direction from us, and I guess I would say a lot of coaxing but they're very close to 50% of their brand – and between their brand and our brand, okay, which I guess, I should say both our brands now. That's one of the encouraging things with Merchants as we bring them on board because they do use the same brand portfolio that Reinhart has. They will remember the same procurement group.

And we've already been through this. And I think that we'll be effective quicker with them than we were with Rhinehart, albeit being much smaller, but we are in a position today where Reinhart is growing their independent business faster than Performance and doing extremely well against two years ago. And their brands, I just continue to see us grow the combination of those two brand portfolios.

Lauren Silberman: 40:27 Great. And just a final question on the Merchants and just your broader appetite for growth for Foodservice acquisitions in '22 as you think forward, whether you're seeing increased activity and interest in M&A?

George Holm: 40:43 Well, we always say the same thing that we're opportunistic.

We're pretty serious about paying down debt right now. We're like any company, we've got certain ones that are priced, right. And if one of those became available, we wouldn't hesitate. But right now, we're pretty focused on paying down debt.

Lauren Silberman: 41:11 Great.

Thank you guys.

George Holm: 41:14 Thanks.

Operator: 41:16 We'll take our next question from Jake Bartlett of Truist Securities.

Jake Bartlett: 41:21 Thanks for taking the question. Just back on Omicron.

In restaurants, most you talked about an impact of a deceleration in December into January. I'm wondering about in your case growth and specifically maybe independents, did you see the same sort of thing? Was there a slowdown in December into January, perhaps you're not seeing as much just with share gains, but any commentary out on just the cadence and the impact on the top line from Omicron.

George Holm: 41:58 Yes. We're trying to figure that out, actually, we certainly saw it in chains even in December, which we didn't see it in independent. We were pleased with the January we had.

It was certainly a little bit softer in independent and a good bit softer in the chain business. We don't know how much was weather, how much was Omicron. It certainly gave us a chance to give a better level of service. And I guess I would say, get caught up and let our people work a little bit less. But it wasn't a big difference.

I mean, we were really pleased with our results, both top and bottom line in the month of January.

Jake Bartlett: 42:47 Great. That's really helpful. And then also just in terms of the cost. You've broken out the impact of the temporary workers.

But I'm wondering what else, what other costs might be temporary basis right now that that you'll eventually wrap. That would include sign-on and retention bonuses, maybe overtime costs, recruiting costs, what else is in the cost structure right now that maybe might go away?

James Hope: 43:15 Yes. I'll give you 1 that's worthy of thought, and we mentioned it a little bit earlier, but I think you made a very good list there. The one to add would be the productivity that as time goes by and the training kicks in, we'll see improvements in productivity. I can't give you a number.

I can't quantify it. But I can tell you it will be helpful, and it's probably the most important one to add to your list.

Jake Bartlett: 43:40 Great. Great. And last question.

In terms of the impact of being your processes, your sales systems, obviously, you've seen the impact on Reinhart and the acceleration of the independent sales growth there. I'm wondering about the opportunity at Core-Mark. What kind of a change in the sales growth just by being under your ownership and your processes, do you think can you expect? Should we expect kind of a similar acceleration of growth from that business versus what we saw when it was pre-acquisition. I'm just wondering the opportunity there.

George Holm: 44:22 Well, they're improving now, and I would contend that would have happened whether we merged with them or didn't.

I think that we have a culture where we're really focused on the independent operator in our businesses in general. And I hope that, that culture will move into them as well. And I'm quite sure it will. We're seeing some real initial success in independent, but I do believe that would have happened anyway. Then when you get to the foodservice part of it, which sometimes gets lost in the huge volumes that they generate primarily because of tobacco sales.

45:12 We'll have the two sales forces working together closely without losing sight of the fact that their core business in both of them are the most important. But I think that that from a culture standpoint will help us, and I see that already. A big part of foodservice when you get to Convenience is pizza and chicken and Hispanic is pretty big. And that's our strength as a company. That's what we do the best in, in foodservice.

So I think that -- I would say I don't see any reason that Core-Mark wouldn't be able to grow faster than they've grown in the past. They didn't have the tools in foodservice that they're able to get today. 46:05 And the great part of that is they recognize that. They recognize that in our early conversations. They saw it as a real positive for the companies to be together.

So it's not like us saying we're going to show you how to do this. They know what they're doing. It's just they didn't have those capabilities and the inbound capabilities, and they didn't have the brand. They didn't have the volume in foodservice really to have a brand of their own. So it's exciting.

I mean it's a great time for Core-Mark and for our organization with them.

Jake Bartlett: 46:42 Great. I appreciate.

Operator: 46:46 We'll take our next question from Nicole Miller of Piper Sandler.

Nicole Regan: 46:51 Thank you.

Good morning. I wanted to ask about sales channels like by percentage. And the three reporting segments, we can obviously calculate at that level. But if you think about pre-pandemic and pre some of these acquisitions you've been discussing today. For example, within 66% foodservice, it used to be, I think, something like 30%, 40% national chain; and health care, hospitality, education, 12%.

Those metrics, right, the restaurants within Foodservice, national chain, independent and the other business lines now that they're different and the recovery hasn't been same in like each channel, can you give us a little bit of an outline of where those stand today?

George Holm: 47:40 Not much different than in the past other than the addition of Core-Mark. The independent within Foodservice continues to be a bigger part of our business. But within the independent, we're still biggest in pizza and Italian and actually we're lapping some pretty big numbers from last year in pizza, and we're still running double-digit growth. So extremely pleased there. And then when it comes to contract feeding and lodging and healthcare, that's not really what we do, we do some of it.

And then we've always been heavy chain as a company, and we like the chain restaurant business. And you'll see a bigger emphasis on that again as we have a real feel for where our costs are going to be going forward. But I still see us growing faster independent than we're growing chain. So I hope that answers your question or I guess as best as we can.

Nicole Regan: 48:52 Yes.

I think just the fact that it's relatively unchanged because where I'm going is trying to understand gross profit margin. And the idea, I think, if we hear you, is that you've acquired a lot of gross profit dollars, like massive dollar growth. Gross profit percentage is down for a number of reasons. Some of the businesses are different. But again, a lot of dollars in areas that aren't competitive for you, so you can have all of the share, and you've acquired growth.

But how do you think ultimately about reconciling those gross profit dollars and growth opportunities you brought in against gross profit margin percentage. Like how much is there up for grabs to have that gross profit margin look more like it used to historically.

George Holm: 49:41Well, we look at things per case. So I got to address this. I'm going to answer it in the way in which you asked it.

We probably, as a management team, don't spend five minutes a week on tobacco, but that's the difference. And you have a product that's less than 15% of the cube and close to 80% of the sales in Convenience. Now that's going to change over time. But what I will say is that our EBITDA margins, we've always grown them unless M&A took us into an area that was much lower. And our growth in that real low-margin category is only going to come with new accounts.

There's not going to be any organic growth at all. And I guess our commitment would be that excluding that, I mean, we're going to continue to grow our EBITDA margins, and it's a business that we have to have to be in the businesses we're in. But we look at what percentage of the gross profit dollars make it to the bottom line, and we continue to improve.

Nicole Regan: 51:08 That's fair. And then just the last one.

It's really helpful to hear about labor, right, and you're talking about moving in the right direction overtime's down, it sounds like people are coming back to work permanently, I guess, right, in the field. Can you talk about turnover in terms of drivers and selectors and how that's been trending?

James Hope: 51:30 Yes. I think the short answer to that, the clear answer is turnover is improving. It's been a challenge. It's still a challenge.

It's less of a challenge, and we expect it to improve across the next 6 months. I would say that backing up from that question a little bit broader. If you think about the factors that drove just a really great quarter for PFG, clearly, the independent growth, we've talked a lot about drive a super strong quarter for us, and we expect that to continue. It's always been important to us and it will continue to be important. Vistar's continued recovery has been very helpful and the progress they're making has really helped drive a great quarter and margin improvement and improvements in labor were another big area that we talked about, and they'll continue to improve across the next 6 months.

And as part of the improvements in labor is an improvement in turnover. All of those things are what contributed to a powerful earnings quarter for PFG and the trend.

Nicole Regan: 52:34 Thank you.

Operator: 52:40 We’ll take our next question from Kelly Bania of BMO Capital. Q –

Kelly Bania: 52:45 Hi, good morning.

Thanks for taking my questions. So many questions. I guess maybe starting with just technology and digital. Some pretty big investments by some peers in the space. And I guess I always think those PF, particularly Foodservices is more of a people driven organization.

But maybe can you just help us understand where you think you are in terms of technology and digital and sales force tools on that front? And if you think you need to make any investments there. I mean, the results clearly speak for themselves, but just thinking over the next several years.

George Holm: 53:28 Well, we continue to make investments, and we want to make sure that our people have all the tools that they need to address their customer. I do feel that over time the digital will be used by more and more customers. So we're making sure that we have what we need and we make those investments.

I mean we always talk about the people first. We always speak that way to them, too, that we're going to give them the tools that they need. But the most important thing is that they're making the calls and that they're committed and they love their customer, and that's kind of what we preach. But don't confuse that with us not having the technology that we need, we certainly do.

Kelly Bania: 54:22 No, that's helpful.

And I guess just as it relates to Core, some questions and concerns from some investors, I guess, just in light of where C stores could be in light of the longer-term transition to electric vehicles. And just curious how you thought about that as you evaluated Core-Mark and as you think about Core-Mark much longer term?

George Holm: 54:47 Well, needless to say, we did a great deal of work, particularly our strategy person who actually came out of Altria. But we did a lot of work around that before doing the acquisition. And it just came back that – I mean, it could have an impact, but if did it would be nominal that convenience stores are part of people's lives, and it's habitual and it's not necessarily fuel that's driving that.

Kelly Bania: 55:21 That's helpful.

And then last one, I think – did you mention something about value stores being somewhat challenged from a cost-to-serve standpoint. Can you clarify what you meant by that?

George Holm: 55:36 Well, it's just the part of our Vistar business where the labor has had a larger impact. They're smaller deliveries. And we're just addressing that with our customer base, and it's going well.

Kelly Bania: 55:50 Okay.

Thank you.

Operator: 55:54 We'll take a question from Peter Saleh of BTIG.

Peter Saleh: 56:06 Great. Thank you. And congrats on a great quarter.

I just wanted to ask, I mean, last quarter, you guys had mentioned that the vast majority, if not all of your growth was coming from existing customers versus new customers? I think you touched on this earlier, but could you just give us an update and elaborate a little bit more. Is that trend continuing or have you seen a little bit of a shift there and you're getting just more growth from new customers?

George Holm: 56:37 Yes, I will do that. Our growth within our customers has continued to be really strong. And the uptick from first quarter to second quarter was almost all driven by new customers. The difference between the two, but we still have just really done a much better job penetrating the accounts.

And also, I think that with less accounts out there, those that are open are doing more business. So it's a combination of the two. But going out and pursuing new business is something we're going to be very aggressive with.

Peter Saleh: 57:12 Thank you. Very helpful.

And just on – coming back to inflation, it looks like food inflation, commodity inflation was about 140 basis points higher this quarter versus last quarter. We would have expected that to kind of maybe peak and start to come down. But what are your expectations here on food cost as we go through the balance of this year? Do you feel like we've peaked? Or are we just going to continue to see these elevated prices for a while?

George Holm: 57:43 I'm not sure we know, okay? Part of our increased inflation is, ironically, we're growing the fastest in those categories that have the highest rates of inflation. I think that's labor. And even where, I mean we have suppliers that the product that they sell.

They have plenty of it and they can't get it to us because they don't have the packaging they use to get it to us. So a lot of this is – some of its upstream, some of it is downstream, but it's just going to take time, but we have seen great improvement in Foodservice. And it's very encouraging.

Peter Saleh: 58:27 Great. Thank you very much.

Operator: 58:33 And this does conclude our question-and-answer session for today. I'd be happy to return the call to Bill Marshall for any concluding remarks.

Bill Marshall: 58:41 Thank you all for joining our call today. If you have any follow-up questions, please contact us at Investor Relations.

Operator*: 58:50 This does conclude today's conference.

You may now disconnect your lines, and everyone, have a great day.