Good morning, and welcome to the PFG Q1 Fiscal Year 2018 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 Mr. Michael Neese, Vice President, Investor Relations, for PFG. Please go ahead.

Thank you, Crystal, and good morning. We are here this morning with George Holm, Performance Food Group's CEO, and Tom Ondrof, PFG's CFO. We issued a press release regarding our fiscal first quarter results this morning. The results discussed in this call will include GAAP results 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. 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. Now I'd like to turn the call over to George.

Thanks, Michael. Good morning, everyone, and thank you for joining us today. I'm very pleased to discuss our strong first quarter financial and operating results. We started the year off with strong broad-based momentum across our company. This resulted in top line growth of nearly 8%, continued independent case growth of over 6%, and adjusted EBITDA growth of nearly 20%. As a reminder, we closed the distribution center and the Customized segment back in June, and this impacted our top line results for the quarter. Our team's focused execution enabled us to generate the total case growth of nearly 4%. As you may recall, we are lapping a strong first quarter of fiscal 2017, where we grew our total cases at 6.5%. Each of our business segments contributed to our EBITDA first quarter growth, most notably Vistar, with over 18% improvement in EBITDA, and all are on track to deliver their full year growth objective. PFS's independent sales as percent of total segment sales improved approximately 100 basis points to 46% of their sales. As you would expect, the hurricanes had a minor impact on our operations, specifically in Texas and Florida. Fortunately, all of our associates are safe and we had very little physical damage to our distribution centers. We estimate that the net impact from the hurricanes on our total adjusted EBITDA to be in the $2 million to $3 million range, most of that coming in the first quarter. The strength of our operating performance enabled us to generate a significant improvement in cash flow, which Tom will describe later in his remarks. This year, we expect to capitalize on our fiscal 2017 strategic investments and expect to deliver strong and consistent growth throughout this fiscal year and the years to come. Before I turn the call over to Tom to discuss the financial details, I'd like to highlight one of our associates. As our nation observes Veterans Day this Friday, I would like to recognize Dorothy Sullivan, a military veteran and transportation supervisor with our Performance Foodservice operating company in Augusta, Maine. Dorothy served 31 years in the Maine Army National Guard, where she rose to the rank of First Sergeant. During her tenure, Dorothy trained units in fitness and marksmanship before they deployed to Iraq and Afghanistan. She was also an Army musician before joining PFG in 1995. We're proud to have her on our team, and we thank her for -- and all the veterans for their military service. I would now like to turn the call over to Tom, who will discuss our first quarter results.

Thank you, George, and good morning. Let's take a look at our first quarter consolidated financial results. We're pleased to deliver $4.4 billion in net sales for the quarter, an increase of nearly 8% compared to the prior year period, as a result of broad-based growth in all segments, the impact of inflation and contributions from prior year acquisitions. Overall, food cost inflation for the quarter was approximately 2%. We're experiencing inflation in the center of the plate items such as meat, poultry and seafood, partially offset by deflation in cheese. First quarter gross profit dollars grew nearly 9%, outpacing net sales growth by 60 basis points to just under $555 million. The gross profit increase was fueled by case growth and through an improved sales mix of customer, channels and products, primarily in the independent channel. Total company adjusted EBITDA for the quarter was up nearly 20% to $90.7 million, driven by strong gross profit growth, tight control of operating expenses, and more normalized medical and workers comp costs within corporate as well as contributions from acquisitions. Importantly, adjusted EBITDA margin was up 20 basis points compared to the prior year period. Net income increased to $22.6 million or 85.2% for the first quarter compared to the prior year period, driven by higher operating profit, partially offset by increased interest and income tax expense. For the quarter, the income tax rate increased 10 basis points to 37.5%. Adjusted diluted EPS grew by 35% to $0.27 per share. Now let me take you briefly through the segment and corporate results. Performance Foodservice generated net sales growth of nearly 8% for the quarter. This growth is driven by the addition of new independent customers, successful customer pricing in an inflationary environment, and from acquisitions made last year. PFS's EBITDA increased nearly…

Thanks, Tom. I'm going to limit my final remarks this morning so we can get into your questions. It was great to see many of you in September at our Investor Day, and I want to take a minute to reemphasize our key messages. We are a sales-led growth-oriented organization expect to continue to profitably grow our share in a very fragmented marketplace. Our 3-year aspiration is to deliver a balanced 5%, 10%, 15 result. 5% total sales growth, 10% adjusted EBITDA growth, and 15 basis points of adjusted EBITDA margin improvement. We will continue to focus on growing our independent customer base and providing each with a customer-centric personalized service experience, and will continue to develop and enhance our online customer portal tools to have available as our customers’ needs dictate. We'll further expand our Performance Brands private label business to help improve both the quality and profitability of our customers' business. We will continue to rationalize the portfolio and customer base within Customized, develop and expand our e-commerce platform within Vistar and take advantage of our cross-selling opportunities within our newly acquired specialty companies. And finally, our M&A pipeline remains robust. We feel good about our strategic direction and the long-term growth runway for our business. We remain focused on increasing our market share and investing in our associates and customers. And with that, operator, Tom and I will now be happy to take any questions.

[Operator Instructions] And your first question comes from the line of Andrew Wolf with Loop Capital Market.

I think I'll get right to the guidance question. So first quarter beat me and everyone else, I think -- so how did the first quarter come in on EBITDA to your internal expectations? Was it also a beat internally? And if so, was it -- just a minor -- why didn't you raise guidance? I know -- is it because it's early in the year? Or what would be the flavor there?

Right. Probably, not really wanting to comment on internal budget and sort of play there. But in terms of why we didn't raise guidance, it is early. I mean, we've had 2 mild winters the last two years in Q3, so will that continue. There is potentially a bit of a ripple effect on the hurricanes. We have a number of customers in Florida and Texas that are evaluating whether to reopen and we need to sort of keep an eye on that. So yes, it's early. We feel good about it. We're at the top-end of the range. We actually think that this will be our -- the weakest quarter of the year in terms of case growth. So feeling good about the year.

Okay. Just as a follow-up. Tom, can you elaborate why -- is it comparisons? Or is it the case growth commentary? Is it due to the strong quarter last year? Or is it -- you just see some momentum coming in your sales efforts?

I think it's a bit of a combination. We do have weaker comps as we move throughout the year, no doubt. But I think we have some real strong sales momentum as well. George has touched on a couple of new customers that we have coming on within PFS, and I think we feel good about where we sit with that.

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

I just actually wanted to follow up on that slightly differently. So it seems like your first half was guided down slightly but your second half was guided up. So wondering, I guess, if you could give a little more color on that? Because it would seem in that second -- well, first quarter maybe came in slightly later given the hurricanes. And maybe your second quarter is unchanged. But can you just clarify that?

That's dead on, Karen.

Okay. And then, I wanted to just switch gears a little bit. In terms of gross margins, I know you guys don't tend to give this in granularity by segment but it seems to be a significant area of focus. Can you clarify how much maybe gross margins were down at PFS? Because it seems like Vistar, clearly margins -- gross margins were up and that kind of contributed to your blended reported gross margin. So maybe a little color on what you're seeing on gross margins at PFS?

Yes, we didn't experience a decline in gross margin in Performance Foodservice. More flat but definitely an increase in our gross profit dollars per case in Performance Foodservice.

Okay. But gross margins were flat?

Correct, that's correct.

Okay. And then, I wanted to also just clarify, obviously, we know that you had closed the Georgia facility last quarter. But what was the actual impact of that closure on the Customized top line growth? Because it seemed that Customized came in at slightly -- well, fairly significantly weaker than at least we were modeling.

For Customized, it's about 500 basis points of top -- off their top line growth.

Okay. So that's something that we should expect will be a headwind for the remaining until you cycle that, correct?

That will be almost right on with the fiscal year, couple weeks shy of being exactly the same as the fiscal year.

Okay. Sorry, to clarify, we'll have that negative impact until you cycle it for the rest of the year?

Yes.

Correct. That's correct. Yes.

Okay. And then, I guess, maybe the last question. Just maybe a little color on your ability to pass on inflation with the noncontract customers because that seems to be an area of focus for investors who are concerned. Is it -- that customer base is the highest-risk customer in terms of ability to pass on relatively high inflation?

What we experienced in our first quarter was that we were able to pass it on as far as gross profit dollars per case. We actually had an improvement there, and we weren't able to grow our margin as a percent of sales through that period of time. But we thought that was a great outcome that we were able to actually increase our gross profit dollars per case.

And that's specifically with the noncontract that you're making that comment on that?

That's correct. Yes, that's correct.

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

Maybe I missed it but did you reaffirm the 3% to 5% organic case growth for the year?

We did not specifically, but it is. It's there, yes.

Okay. And separately, did you say what inflation was for the quarter?

We did, 2%.

Your next question comes from the line of Karru Martinson with Jefferies.

When you guys look at the hit from the hurricanes, a number of your competitors have talked about higher freight rates continuing. Is that something that you're seeing here as we come into the second quarter?

Yes, we are. There is a lot of product going in and out of those marketplaces. Quite frankly, they can make more money shipping that product than they can -- our food. And it's not a huge issue but it's definitely an issue, and I think you need to couple that with the driver shortage. In some ways, it's hard to tell which one is having more impact. But it's something that we're managing through but it's certainly an issue.

Okay. And then just from a big-picture perspective. How much of your business today, would you say, is, kind of, driven by an e-commerce ordering platform? And where would you like to see that get to?

Well, if you look at our Performance Foodservice business, about 50% of our business comes in through e-commerce and it's about 15% of our independent business. And then when you go to our Customized business, it's really 100% that would be, I guess, in today's terminology, called e-commerce. And the bulk of our Vistar business would also be what would today would be called e-commerce. And we're happy with those numbers right now. We want to continue to increase our capabilities and get orders any way the customer wants to place them, but we also want to make sure that we are giving the customer the proper amount of personal attention.

Your next question comes from the line of John Heinbockel with Guggenheim Securities.

Can you hear me guys?

Yes.

Yes.

So let me start with the procurement changes that you're making, right, with the different segments vying for the whole company. When does that really kick in, in earnest? And just remind us, when you think about the magnitude of margin opportunities, where does that one sit? Is that one of the biggest?

Well, I think, we'll make steady improvement there. I don't think that would be real high on the list of things that we think are going to increase our margins. But certainly, incrementally, it's going to help us, and it's a pretty simple process. We're just looking at suppliers that each one of our businesses or at least, certainly, 2 of the businesses does a significant amount of business with that supplier and as opposed to both trying to negotiate our terms with the supplier, we have 1 person. So just kind of increasing the amount of leverage, I guess, would be the right word, that we have with the supplier.

Right. So that's really not a ramp-up? That actually can be fully in place fairly quickly. Is that fair?

That's correct. That's correct.

Okay. And then secondly, we've talked about the opportunities in center of the plate. You've made some specialty acquisitions working with the New York structure that you want ideally. So where does -- and I know not much time has elapsed, but what do you see happening here over the next 6 to 9 months? Do you think there will be more acquisitions in that area? Or you want to, sort of, get the right approach organizationally first and then do some more acquisitions?

Well, the 3 that we have are doing very well. 2 are in Florida, so you can imagine they had an impact on the month of September. So I guess, I would say, they're doing well July, August and October. But the structure is in place well. We don't have the structure in place that we want in our embedded ones. So we're ready to make acquisitions. We just are making sure that we get the right ones. But so far so good.

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

Wanted to ask, I guess, the Georgia facility question. Another, where I think you said it was 500 basis points to Customized top line. What was it to total case growth for the quarter?

For sales, it was -- for sales growth, Kelly, it was about 100 bps. For cases, I don't have that number. We can come back to you with it--off the top of my head.

Okay. And in terms of the hurricane impact, are you willing to break out the impact on cases versus the higher inbound freight or any other impacts?

I think that's hard to do. What we do is so intertwined. Neither of those areas are big backhaul areas but it -- there certainly is product that we're pulling from those. We do some where we're actually hauling for one of the other of our companies. So, I mean, it was disruptive. The level of disruptiveness and what the financial impact was, I think it's difficult for us to determine.

Got it. And then in terms of the second half EBITDA growth outlook, now high single digit from mid-single digit, just anything that's changed there in the back half with the segments, the new customers, inflation, or, I guess, what really changed in the back-half outlook?

Well, we have some business coming on which will be helpful. Some of it starting the beginning of January. We have slightly better momentum as we've gotten into the second quarter in our independent area. Only 1 month, but we feel confident that, that will continue to show. And Vistar had very weak theater sales so far this fiscal year and it's not anything to do with the company, it's just the industry itself. And that will be strengthening particularly as we get into December and moving forward. So those would be some key reasons that we see things getting better.

And I'll add, Kelly, that the corporate expenses, a month or 2 or 3 in, don't quite make a trend, but we're seeing some good trends there. And we're feeling a little more comfortable about some of those expenses and how they may play out over the next 3 to 6 months. And as I said at the Analyst Day, just maniacal on our corporate overhead control.

One other thing I would add is that our automated pick and pack center, we've been a little hesitant to add much more volume in there as we talked about on the last couple calls. We've had some problems getting that up and going. Well, we just went through the holiday shipping period for the seasonal product and that is the peak period of time for shipping for us, and we went through that with no glitches and no problems. So we're much more confident ramping-up that facility and doing more of that type of the business in our Vistar.

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

Nice quarter. Just wanted to ask, I know, obviously, the last couple days, there has been some pressure in the space and I think investors at least kind of the questions that we on the phone are getting are just kind of uncertainties around, and I guess kind of like the near-term outlook for the industry case growth and then also of course on the pass through of some of the inflation. So with that just as the backup, could you maybe just give us a little bit more sense for maybe kind of if you are seeing any changes in 2Q so far? Obviously, still nice growth implied by your guidance. But maybe, Tom, with the comment before about, it could be the lighter quarter of the year for case growth specifically. And then maybe if you are seeing any changes either from any specific customer channels or on the inflation side, that would be helpful.

Yes, I think I'll go ahead and comment on that. The industry, as far as traffic goes, has been slow. And there are a few different companies that follow that and that's what we've been reading. We do see that in our customer base. And probably, I would say, we haven't seen anything different in October than we did in the first quarter. The industry itself, I think, it's a hard industry to track. I think there are maybe overstored situation today. So I think that adds to it. But it's still a very large industry. We feel that we have a quite a small share of that industry. So we're not that concerned moving forward with kind of what that macro looks like. We're confident that we can build momentum as we get through each one of the quarters in this fiscal year.

And, Vinnie, I'd just add. If you sort of break it down by segment a bit, I mean, PFS has got some good new business coming on. George mentioned that big customer in January. Customized is soft but there is a point where just its -- the decline is not sort of hurting your growth rate. And then Vistar has been very strong. We're expecting a big theater season coming up through the holidays. Retail continues to be strong, as George mentioned. Hospitality continues to be strong. And then that's all sort of encapsulated by weaker comps from last year. So, I mean, all the momentum is pointing in the right direction for us, and we feel very good about it. And, again, feel like the first quarter is going to be our weakest case growth quarter of the year.

The first. Okay. All right. Okay. Got you. No, that's helpful, guys. And then just a quick follow-up. Just any updates around the dollar store business in terms of -- I know obviously, a few quarters in, I know you're still kind of working through some of the changes there. But any updates in terms of the capacity situation? Or how it's going so far?

Yes, it's moving along well. And again, the client's been great. We've been working together to come up with some of the solutions, particularly in New York. We have found a location in New York to consolidate both facilities into the new one and the existing one. We're going to add square footage when the dust settles with that, and we hope to have the -- that we have an agreement with the landlord and hope to have that signed within the next couple of weeks. And we'd have those two facilities consolidated into one by -- probably just after the end of the fiscal year, sort of July time frame.

[Operator Instructions] And your next question comes from the line of Edward Kelly with Wells Fargo.

George and Tom, can we dig into profit per case a bit here? I know there is -- people want to talk about margins. But when I compare gross profit dollar growth to case growth this quarter, the spread's as big as I've really seen it since you've been a public company. So it seems like profit per case accelerated. So could you just talk about the drivers of that for the quarter? And maybe tie in the impact that inflation may have had?

Yes, I'll chalk it up to 2 things: one, the PFS team is doing an awesome job, I think, with inflation and the MarketWatch tool and sort of holding on and even building upon the profitability per case, and Dave Flitman demonstrated that and showed that a bit at the Analyst Day last month. So I think that's starting to have huge impact and that's not even fully rolled out yet. The other thing is, mix is obviously contributing. Red Lobster carries a better profit per case. So the change out of those 5 customers from 1 helped. So I think between the MarketWatch tool, just good focus on that metric. And then some mix changes sort of resulted in what you're seeing.

And then, just a follow-up, George, on your commentary around the industry and the fact that there has been some slowness out there. As we think about your case growth for this quarter and the difference relative to what you were putting up last year, how much of that is just sort of like company specific things versus what you think maybe some slowdown, generally, overall in the market?

Well, if you look at the business from what new business we bring in, how well we penetrate the customer, that's somewhat a reflection of the same-store sales, particularly when you get to a chain business and then the business that we lose. And what we saw in our first quarter was we weren't picking up new business at the rate that we had in the past. And we saw that we had to put a little bit more emphasis on that which we've done and we're seeing that improve. Our -- what we would call kind of same-store sales purchases, I guess, we've seen that as being slow, particularly in the chain area. And we've done a real good job as far as retention, and we've continued to improve our ability to retain customers. So what we see as we get further into the year is that continued retention. We feel like we'll continue to do well there. As far as penetration, within our change, I -- we don't see the same-store sales growth being worse as the year goes on, maybe similar to what it is now but certainly not worse. And then we see our amount of new business continuing to improve.

Can I just add one comment to that. We've seen a good acceleration in the first quarter in our -- in hiring sales folks within PFS. And I think again, that's going to support that case growth into the second quarter in the back half of the year probably on track to get back to historical rates in terms of adding sales people. So we're excited about that and the momentum that's going to build.

Okay. And then just, Tom, one last question for you. On diesel cost and the increases year-over-year, can you just talk about how that's impacting the P&L? And how you're navigating that?

It's not really registering. I mean, I can't specifically talk to you about it, which probably indicates that it's not been a particularly material issue for us. I can take a deeper look at it if you want to take that off-line.

At this time, there are no further questions. I will now turn the conference back to Mr. Michael Neese.

Thank you everyone for your interest. We look forward to seeing many of you at next week's Morgan Stanley conference. Have a great day.

This concludes today's conference call. You may now disconnect.