Good morning, and welcome to the PFG Q2 Fiscal 2017 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 will now like to turn the call over to Michael Neese, Vice President, Investor Relations for PFG. Please go ahead, sir.

Thank you, Lori, and good morning, and thank you for joining us today. We're here this morning with George Holm, PFG's CEO; and Tom Ondrof, PFG’s CFO. During our call this morning, unless otherwise stated, we are comparing second quarter fiscal 2017 results versus the same period in fiscal 2016. We issued a press release regarding our results this morning. You can find our earnings release on the Investor Relations section of our website on pfgc.com. Our remarks and 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 in our SEC filings for various factors that could cause our actual results to differ materially from forward-looking statements and projections. On today's call, we may reference certain non-GAAP financial measures. Descriptions of these non-GAAP financial measures and reconciliations to the most closely comparable financial measures calculated in accordance with GAAP are included in today's earnings release. Now I'd like to turn the call over to George.

Thanks, Michael, and thanks for joining us today. I'm pleased to share PFG's second quarter fiscal 2017 results with you. Let me start with some highlights. All our business segments performed in line with our expectations during the second quarter despite the softness in the casual dining industry and the restaurant industry in general. We grew our total cases by 5.6%, and we did that by taking market share. Gross profit improved by 6.2%. Our Performance Foodservice segment, which is the largest segment, reported the 30th consecutive quarter of independent case growth at/or above 6%. This achievement is even more impressive when you consider the fact that we were lapping nearly 9% independent case growth in the same quarter last year. Also pleased to report that through the first 5 weeks of this fiscal quarter that we are back in the middle of our guidance range of 6% to 10%. Penetration of our Performance Brands, which are more profitable, continues to show strong growth. Importantly, our strategic investments in Vistar's automated retail center in the dollar store channel, along with the Customized transition of Red Lobster, continue to progress as planned. These initiatives will help strengthen our foundation for increased growth in the second half of fiscal 2017 and beyond. Before I turn the call over to Tom to discuss the financial details, I would like to highlight one of our associates. It's a pleasure to have the opportunity to recognize a PFG associate who went above and beyond the call of duty at the end of the long day in inclement weather. Murrel McDonald, a driver with our distribution center in Augusta, Maine, recently assisted an individual he saw struggling to get into their wheelchair in our customer's icy parking lot. The restaurant owners were so impressed with his act of kindness that they called to say thanks and offer praise. Thank you, Murrel, for your thoughtful and caring attitude and for exceeding our customer's expectation. And on that positive note, I would like to turn the call over to our CFO, Tom Ondrof.

Thank you, George, and good morning to all. I will take you through our second quarter financial results, including an update on certain corporate expenses that we highlighted on our last call. Net sales for the quarter increased 4.1% over prior year to $4.1 billion. Overall, food cost deflation was approximately 1%, driven by the meat, egg and produce categories. Our adjusted EBITDA declined 1.9% to $93.6 million, in line with our expectations and reflects the impact of our recent strategic investments. We are pleased to note that adjusted EBITDA improved sequentially throughout the quarter capped by high single-digit growth compared to prior year in the month of December. Net income increased 30.9% to $22.9 million, aided by a reduction in interest expense and a 60 basis point decrease in the income tax rate. Interest expense was favorable due to debt repayment using the proceeds from our initial public offering in fiscal 2016. The decrease in the tax rate was primarily a result of an increase in permanent deductions related to the adoption of a new accounting standard. Diluted earnings per share increased 29.4% in the second quarter to $0.22 and adjusted diluted EPS increased 11.5% over the prior year period to $0.29 per share. Now let me take you briefly to the segment results. Performance Foodservice net sales for the second quarter increased 1.8%, driven by winning new independent customers and further penetrating existing customers. Independent sales, as a percentage of total segment sales, were up approximately 120 basis points to 43.6%. EBITDA for PFS was $76.9 million, up 4.8%. The increase was led by a favorable shift in the mix of cases sold to independent customers, further penetration of Performance Brands and procurement gains offset slightly by increased operating expenses as a result of case growth and continued…

I'd like to provide you with a brief update of our strategic growth investments in Customized and Vistar, touch on the topic of deflation and then summarize our outlook for the remainder of the fiscal year. First, I would like to quickly highlight our new business with Red Lobster's. We head into the back half of fiscal 2017, the transitional costs associated with Red Lobster are behind us. Customized will benefit from delivering to all 678 domestic restaurants, and we expect them to show EBITDA growth in the back half of fiscal 2017 despite a challenging casual dining industry. Late in the fourth quarter of fiscal 2016, Vistar began servicing new geographies in the dollar store channel, which required additional expense with another distribution center to service the customer. Productivity continues to improve as we progress through the second quarter. We anticipate the additional dollar store expense will continue to impact Vistar's results for the next several quarters until the volume can be fully integrated into Vistar's core distribution network. Although the additional expense will be with us for the next several quarters, we are confident the dollar store channel in Metro New York will be profitable and afford us future opportunities for growth. The second investment for Vistar is the prototype distribution center outside of Memphis, Tennessee, for handling our pick-and-pack volume more efficiently. The distribution center is now shipping products, and we are on track to deliver cost savings to Vistar in the future. The additional cost for maintaining 2 distribution centers for our pick-and-pack volume is expected to be behind us, as we head into the fourth quarter of fiscal 2017. Along with the start-up cost to bring the prototype distribution center online, these short-term transition costs are expected to normalize in the second half of the…

[Operator Instructions] Your first question comes from the line of John Heinbockel of Guggenheim Securities.

So George, if I look back historically before this year, right, there was a history of the food service EBITDA growing 12% to 20% or something like that. The last 2 quarters, 5%, and it looks like ready to get back to where you want to be in the second half or back to double digit. So if you think about the last 2 quarters being an aberration, that -- I assume that's a fair characterization. Is that largely because of the investments in the sales force or some other factors?

Certainly, the investment in the sales force has impacted us, but I wouldn't say that that's been a real significant impact. We've also invested heavily in delivery. We spent a good deal of energy, and I would say, money around taking our workforce to almost entirely full-time employees with little dependence on temps, so that affected us. But we feel good about our food service business. We feel good about it getting back to double-digit EBITDA growth, and we're pleased with how we started this quarter with our growth in the independent sales.

And then if you look at -- you talked about the M&A pipeline sort of generally. Again, you've had a, prior to the whole Sysco-U.S. Food thing, a very strong track record of doing a lot of M&A every year. It's been a little light the last probably 1-year plus, maybe lighter than you'd like. Is that still -- are the assets not there? Or are they not there at the right price?

Net price is always a key, right? I would say that getting these negotiated and getting them finished are not an easy process in today's environment. We did get a couple done in the food service area last quarter. We've already got 2 that we've closed on in the month of January. And the 2 that we had last quarter were laid in the quarter. So I feel like we're building some momentum. And Tom, you might want to comment beyond that?

No, I think that's true. You're out certainly looking and having lots of conversations. And I think all the folks are doing that. It's just a matter of the timing coming together. But certainly, the activity behind the scene is there.

Your next question comes from the line of Edward Kelly of Credit Suisse.

George, could we maybe just start with case growth. Could you talk a bit about the trends that you really saw throughout the quarter? And in addition, more detail on what you're seeing so far in Q3 and what we should be expecting? We did hear from Sysco yesterday talk about tough comparisons in the current quarter, March being a big month. A lot of favorable weather last year. I'm just trying to wrap our heads around how we should be thinking about all this for you.

Yes, what we saw last quarter, we did see softness with our customers. It wasn't consistent, though, I mean, kind of election week and for a couple of weeks afterwards, we actually saw an uptick in -- saw it in casual dining. And then it's just kind of all petered out as we got into the month of December. I think the calendar was a little bit more difficult from the comparison standpoint, the way the holidays fell. And then as we've gotten into this quarter, I think the calendar has been a little bit more favorable for us, a little bit of weather issues, but not much. Last year, our March was a very big month. We actually had double-digit independent growth in the month of March last year. So there's potential for tough comparisons if we run into weather issues. But at this point, we're probably -- I would say we're not that concerned, particularly since we've seen an uptick from an independent standpoint over the last 5-week period.

Okay. And then as we think about independent case growth, 6% this quarter. And you mentioned sort of this, the drivers being new customers and increased penetration of existing customers. How does that mix breakout? How much of this is driven by you taking share of wallet versus on-boarding new customers because of the industry growth?

What we've seen in the last quarter is just very slight decline in our new business that we bring in, but it's very, very slight. We've actually, with lost business, we've gotten better. The penetration, we're penetrating with lines, but what we're not seeing is existing lines. In other words, product that we sold to customer last year and we're selling them that SKU this year. We're not seeing the growth. So that to me just reflects a little bit of softness in the industry.

So when you talk about penetrating existing customers, can you provide a bit more detail about what you're doing there to drive independent case growth?

I think we have a motivated sales force. We feel we've given good information as to what those key items are, and we leave it to them from there, Ed, I mean, it's kind of their responsibly to penetrate the customers. And so far, they're doing a good job with that.

Okay. And then just last question for you on the outlook. We're obviously into the second half now. I think last quarter and as we think about sort of like the overhang on your stock, the sharp recovery in the second half within the guidance is certainly playing a role. Could you just talk about how your confidence around the back half has evolved now that we're another quarter into the year, and the key variables that are really needed to hit your back half goals?

Yes, I'll make a couple comments and then turn it over and let Tom make some comments, too. What gives us confidence is, we sit and make projections. I mean, we spend a lot of time with our people and we vet it pretty heavy. Also we've seen such sequential improvement last quarter right into the first month of this quarter as far as comparisons to the previous year. So we feel very good with it. The other thing that we have is much easier comparisons once we get past March and we hit that period of time where we were exiting business in Customized before new business came on, where we were starting up the retail automated facility, where we had some start-up issues. So that also helps. So with that, I'll have Tom make a couple comments as well.

I think we -- again, as George said, we spend a lot of time looking through the prior year comparisons, understanding where the expenses were last year and how they compare to what we see going this year. And we do see a lot of these expenses peeling away in the second half. Again, Red Lobster is behind us. Pat and the Vistar team are doing a great job with the automated retail center and the Dollar Tree channel. So we have a visibility that a lot of those costs are peeling away and the confidence comes, obviously, in that being in our control as opposed to an outside variable. What gives us a little bit of pause would of course be, as George has said in the past, weather and something sort of moving the other way on case growth in the casual dining environment. But a lot of this is within our control, and so we have that confidence in that visibility.

Your next question comes from the line of Zach Fadem of Wells Fargo.

So you mentioned a slight decline in new business. Could you comment on the competitive environment there, particularly when it comes to bidding for the national chain restaurants? Just given the challenges out there for casual dining, are you seeing any changes as far as who's outbidding for this type of business? And are you seeing any different now terms of pricing for these contracts versus maybe a year ago?

Well, ironically, obviously, Customized is the business we have that's struggling the most, and that's where we've had the most opportunity to bring in new business, which at this point for the most part we've passed. As far as who's bidding on that, I don't have a great feel for that. I know there's been some RFPs done, where there hasn't been anybody come back other than the incumbent. So that's a little different for us to see. But our focus right now is with the existing customer base that we have, making sure that we have the right arrangements with those accounts, making sure that our service levels stay where they're at. I mean, our service levels in our Customized have just been unbelievable of late. with better than I actually thought the company could perform as far as fill rates and on-time rates and those things that our customers tend to measure us by. As far as how competitive, I think that it's competitive in the street -- independent business, which it always is. So, I mean, it's always very competitive. And I think when it comes to the chain business, if there's -- if there's 2 people involved, it's real competitive. If there's one, it isn't, and that's kind of the business. That's the marketplace today.

Okay, that's helpful. And could you talk a little bit more about the margin outlook for the Vistar business? I know there's several moving parts. But when thinking about just the impact of pick-and-pack facility coming on and then the negative impact from the dollar store channel, which appears to be ongoing, how should we think about the magnitude of margin improvement anticipated in the second half of the year in that business? And what are you thinking in terms of timing for the return of a more normalized run rate for margins there?

Okay, yes. I'll give you the things that we have coming up in that business that give us confidence. One is in the month of January, we were profitable in Metro New York in that second facility. So that's a big change from where we were 8 months ago. It just got better each month, and I gave our people a lot of credit for getting that to where it is today. So it is still going to impact us, but it isn't what I would guess call the dream that it was before. And then with the 2 facilities that we have in Memphis, the equipment that we needed to do some retrofitting with will arrive on February 22. We'll do some tests for about a week. And then we should be in a position to go from 2 to 1 distribution centers. Tom and I are actually out there next week. We look forward to seeing it. But it's operating and it's operated well and it's operating more productively than our automated ones are operating. So we have a lot of confidence there as well. As far as margins, we are at a point now where we're getting double-digit growth in our gross profit dollars and we feel that we can get ourselves in a position where we don't have double-digit growth and our expenses, and that's something that we see happening in the fairly near future. Yes, and I might also mention that we did on the last fall, but we had additional business that we started at the first of the calendar year, additional theater business. We have more that's coming on in the month of February. So as strong as our sales have been in Vistar, we've actually got a little bit of increased momentum here and we continue to be really excited about what we can do from an e-commerce fulfillment standpoint.

Your next question comes from the line of Kelly Bania of BMO Capital.

Just wanted to talk about case growth. I think your initial guidance for organic case growth was in the 4% to 7% range. The first half has been, I believe, just maybe a tad below 5%. So was just curious how you're thinking about the second half. You obviously made the comments about the uptick in independents into the first couple of weeks of the third quarter. But has the chain business bounced back at all as well? Or is that still kind of challenging?

Well, we're projecting about 6% case growth in the second half of the year, so a slight uptick. As far as the chain business, we have seen slowness. And we've seen slowness in our chain business within Performance Foodservice, too, not just with Customized. And there are customers out there that are doing really, really well. But all in all, it's been slow. So that's not something that we're necessarily counting on to get the 6% case growth. It's just hard to speak to that marketplace. We show signs at times, but it just doesn't seem to be any real sustained growth.

Got it, that's helpful. And then the comment about EBITDA growth, how it will build sequentially from 3Q to 4Q. I think it implies the estimates maybe need to be adjusted a little bit. But is the rationale behind that just the expenses lapping further, the further we get throughout the year? Or is there other major factors in that?

That's a big part of it, Kelly, the expenses. But then you've also got a fully implemented Red Lobster volume coming through for the back half of the year and some other new business in Vistar that's been on-boarded in the second quarter that is sort of clean, so to speak, in the second half of the year.

Great. And then just one more -- last one on Vistar. I guess, how much capacity will you have in the Metro New York area once this transition is fully complete?

I would say that's one of the reasons that we've been slow to get a facility. We want to make sure that we get a facility that can accommodate the business that's in both of the existing warehouses and leave us plenty of room for future growth. We feel we're getting close with that. It is not an easy market to find substantial warehousing that has cooler and freezer space, but we're continuing to work out. But I do want to stress again that we are now at a point where it's not the level of profitability that we would like to see, but it is just no longer a drain on the business for us.

Your next question comes from the line of Vincent Sinisi of Morgan Stanley.

And just a follow-up actually on the new business, particularly the dollar stores. Kind of to Kelly's question. So can you just kind of give us a sense for kind of how much of that business you're kind of dealing with today? And where, kind of, as you take on more capacity over time you think the opportunity could ultimately lie? And then I guess just on the facilities specifically, do you think over the next couple of months, we might see that, that new facility officially named or identified at least?

I doubt that we'll have that done within the next couple of months. Like I said, we're being careful to make sure that we get the right location. As far as the amount of business, it was about $100 million annualized in business. But in that channel, what we're seeing is that they continue to add capacity for consumable products, I think, basically from the standpoint that, that gets to the customer in there more frequently. So we look at it as a channel that has growth for us, not just with the existing business we have today but just more and more of a trend towards offering higher level of consumable product.

Okay. That's helpful, George. And just a fast follow-up, just on the M&A outlook. Can you give us any additional color on those few, more recent, acquisitions? I know you said over the last kind of couple of months there seems like 4. And then just kind of going forward, what are you looking for in terms of specific, either geographies or product areas, that would be great?

Yes, the 2 that we had in January, one was a food service seafood distribution business and the other one was a broadline distributor. And we really haven't changed what we're looking at as far as acquisitions goes. Obviously, if we have an opportunity to buy a broadliner that fits with us that would be just great. We want to continue to build out our capabilities in meat and seafood. That's also important to us. And we're going to continue to be very aggressive in Vistar. We're in a lot of channels, so it gives us a lot of targets, I guess if that's the right word for it. And we see the potential to continue to be very acquisitive in that channel.

Your next question comes from the line of Karen Short of Barclays.

Just a couple of housekeeping questions to start with. Within deflation, you gave the deflation number for the quarter, but any color on expectations going forward?

Yes, I think my crystal ball is not doing really well with inflation and deflation. I think we probably experienced a little bit less last quarter than most people in our industry. The cheese prices did go up, and we're quite over-indexed to cheese, we're probably under-indexed to produce, and there was pretty significant deflation in produce. Going forward, there's just nothing that tells us that deflation isn't going to be around for a while, particularly when you look at the center of the plate and how soft pricing has been there. So I would say that the quarter that we just ended is probably pretty reflective of what should take place coming up unless there's just some weather changes that could affect this or maybe more activity in export. That's about the only things I see that could really have much of an impact.

Okay. And then just looking at here, actually, one of the tables here, reconciliation tables. So I was just wondering if adjustment to EBITDA, the impact of acquisition integration and reaugmentation changes, that dollar amount, that was generally related to the smaller acquisitions that you just spoke to this quarter. Or is there anything else that would be in those numbers that would be material?

It is, I wouldn't say it's mostly, but it's -- definitely, that is impacting it. And Michael and I can follow-up with you and get you more details if you need it.

Okay. And then just kind of bigger picture, obviously, your free cash flow generation continues to build and wondering if you could just talk philosophically a little bit on balance sheet optionality, in terms of potentially introducing a dividend or anything like that? I haven't asked you that in a little while.

We've got second half to deliver, obviously, to even bring that into the conversation. So it's not something that we are considering in the near term at this point.

Okay. And then just last question. And you have called this out for the last couple of quarters, but in terms of improvements and procurement gains and PFS being a contributing factor to gross profit per case improvements, is there anything just specific to talk to that, like, that might go away or that's not necessarily -- that's transient in nature?

No, not really. I mean, we're just -- we're always negotiating with our suppliers to improve our position with them. We feel we have a fairly formalized system to do that, but we continue to make progress. I think that as we grow, it'll be probably easier to make progress. They are under kind of the same pressures as we are as far as the industry being soft, so that probably makes it a little bit harder, but we're making constant progress, and I think we will continue to. There's nothing that shows us that we won't.

Your next question comes from the line of Bryan Hunt of Wells Fargo.

I was wondering if you could just talk about your PF branded mix during the quarter. And how much it improved? And perhaps, what type of momentum do you feel like you can have going into the end of the year on improving that mix?

We always state that we want to grow our brands in that 1% to 4% faster than we're growing on our independent sales, and we're right at the top of that range last quarter, which was good to see. Obviously, with the independent sales growth not as good as it had been in the previous quarter, our total brand growth is -- it was down about a little bit from the previous quarter. I want to reiterate again, so far this quarter, it looks like we're back on track there. And we can continue, we think, to do that. And even you look at the sequential decline in our independent case growth, we've been there before too, over this 30 quarters that we've been in that 6% to 10% range. We've been down to 6% before and gotten our growth back up, and I do think some of it was calendar affected. I do think we got some benefit from the calendar so far this quarter. But we're confident in our brands that we will be able to continue with that kind of 1% to 4% growth exceeding our independent case growth.

And then switching gears and talking about the automation technology. It's going to allow you to -- it sounds like, one, you said last quarter that it was more productive than your manual facility. Can you talk about the overall cost, and perhaps, return on this? And whether you think it's a game changer and allow you to chase after more business faster in that dollar channel?

Yes. It probably won't affect the dollar channel that much. These are smaller orders. Where it's going to affect us the most is the ability to do fulfillments of e-commerce-type orders. That's what really makes us a bit more efficient. It makes us more efficient in the retail space as well. And I guess I probably don't have to say that this group, the retail bricks-and-mortar type business has been quite soft. And we think, to some degree, that creates opportunities for us as they look for more ways to grow their business. And this just gives us an opportunity to be more efficient at that and also to handle a much wider SKU base than we're handling today.

I'll perhaps give you a call off-line and dive deeper into it, but thanks for your time.

Yes, as far as the cost goes, I'm really not familiar enough with that, and that's something you could probably get with Michael, and he'll give you more color there.

Your next question comes from the line of Bill Kirk of RBC Capital Markets.

Just one for me. It may be a little ways off, but how do you think about your customer's ability to handle food inflation when it returns on top of their already existing wage inflation?

That's a good question. I am a believer that menu price is going up when food is deflating, is probably difficult for our customers, but they are dealing with wage pressures as we are in our business as well. I think sometimes you just reach a point where the only answer to that is to get a higher price for your product and making sure that, that works its way through the customer and they're willing to pay that price. And I think today, that's probably the difficult thing for our customers. But we can't really speak for them. And it's just -- I think they all look at it differently, and they all offer a different price value relationship, too, so it's easier for some than others.

Our last question comes from the line of Karru Martinson of Jefferies.

Just following up on that last question. In terms of the price differential that you're seeing out there, what are the other drivers that you're seeing given that you have kind of a mix between your independents doing well, certain concepts doing well, but still overall, you guys referenced the challenging casual dining industry. What's driving the growth for these guys?

That's a hard question because we really are careful not to comment on our customers individually. I just think that casual dining, for whatever reason, these people work really hard to put out good products and to do a great job, but for some reason, it's just a bit out of favor. And as to whether that's a long-term issue or not, I just don't think we know enough to say that. We see -- like I said, we've seen signs or it's gotten better. I think the calendar was against them in the month of December. So moving forward, all we can hope is that they keep doing a good job and improve, and then we can sell them more product.

And as you look at your product mix, I mean, are you seeing that kind of sustainability of the form-to-table kind of movement, organics? Is that becoming more and more still at the same growth rates that has in the past of your product mix?

No. We just don't see it as that big an effect on our business. I mean, we do some of that type of product. We don't see a lot of organic out there today. And certainly some, and it's growing. But it's growing from such a small base that I just don't think of it as something real impactful today in food-away-from-home. Certainly, more so in retail. But -- we want to do as good a job as we can do with it and have a big an offering as we can have, but it's just not a big part of our business today.

I will now return the call to management for any additional or closing remarks.

Thank you, everyone, for joining the call today. We look forward to taking your additional questions here in Richmond. Have a great day.

Thank you for participating in the PFG Q2 fiscal 2017 Earnings Conference Call. You may now disconnect.