Performance Food Group Co
NYSE:PFGC
Earnings Call Analysis
Q2-2024 Analysis
Performance Food Group Co
Building upon a successful start to the fiscal year, PFG capitalized on the holiday selling season, which saw notable growth. The company achieved total net sales of $14.3 billion, marking a 2.9% increase from the previous year, aligning with the high end of their prior projections. This was partly fueled by a surprising 8.7% upswing in independent restaurant case growth, a significant leap over the growth in the previous two quarters.
PFG's strategy to reinforce its chain business through new account acquisitions that emphasize profitability resulted in a 6.6% gross profit increase, reaching $1.6 billion. This gain came despite moderate deflation in the food service sector and heightened product cost inflation, which saw a modest uptick to 3.6% compared to the previous quarter. These dynamics affirm PFG's efficiency in bolstering profit growth even under deflationary pressures. Additionally, the company experienced increased operating expenses, primarily due to a larger workforce to meet rising demand, but forecasts improvements in efficiency moving forward.
The fiscal second quarter concluded with PFG recording a net income of $78.3 million, revealing a substantial 10% year-over-year increase. This was accompanied by a nearly 12% rise in adjusted EBITDA to $345 million, situated at the higher boundary of their forecast. With significant year-over-year growth in both diluted earnings per share and adjusted diluted earnings per share, PFG looks towards a vigorous close to the fiscal year, reaffirming a full-year fiscal 2024 guidance with sales projected to hit the lower end of the $59 billion to $60 billion range, prompting expectations of an energetic fiscal fourth quarter ramp-up.
During the first half of fiscal 2024, PFG saw robust operating free cash flow of $554 million, a notable rise from the previous fiscal year. The company's capital allocation strategy—prioritizing investment in the business, mergers and acquisitions (M&A), leverage reduction, and share repurchases—reflects a broad focus on long-term shareholder value creation. PFG's share repurchase initiative during the second quarter, amounting to $50 million, exemplifies their confidence in the company's prospects. Moving forward, PFG continues to scour for strategic M&A opportunities that complement their disciplined approach to expanding their business footprint.
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Good day, and welcome to PFG's Fiscal Year Q2 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Bill Marshall, Vice President, Investor Relations for PFG. Please go ahead.
Thank you, and good morning. We're here with George Holm, PFG's CEO; and Patrick Hatcher, PFG's CFO. We issued a press release this morning regarding our 2024 fiscal second quarter results, which can be found in the Investor Relations section of our website at pfgc.com.
During our call today, unless otherwise stated, we are comparing results to the results in the same period in fiscal 2023. The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found in the back of the earnings release. As a reminder, in the fiscal first quarter of 2023, we updated our segment reporting metrics to adjusted EBITDA from the prior EBITDA metric. 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 in our SEC filings for various factors that could cause our actual results to differ materially from our forward-looking statements and projections. Now I'd like to turn the call over to George.
Thanks, Bill. Good morning, everyone, and thank you for joining our call today. I'm excited to share our fiscal second quarter 2024 results with you today, which were strong and accelerated into the close of the calendar year. Building on a strong start to our fiscal year, second quarter results came in at the high end of the expectations we announced 3 months ago. Once again, we saw broad strength across our business units with strong momentum in our high-margin focus areas.
This morning, I will review our business performance and discuss some recent trends we have seen in the market. Patrick will review our financial performance and outlook for the remainder of the fiscal year. Then we look forward to taking your questions. Last quarter, we discussed our strategic focus on being a leader in the food away-from-home industry with broad exposure to a variety of channels and products.
We believe that our position in the market produces consistent growth across our top and bottom lines and provides resiliency during different economic conditions. The second quarter was an excellent example of this with each of our business segments contributing to our performance.
Let's begin with our Foodservice segment. We are pleased with how food service continues to perform with accelerating case volume growth across both independent and chain restaurants. The outstanding case performance drove sales growth in the quarter despite another period of modest deflation. We'll provide more detail about our inflation expectations in a moment. Independent case volumes accelerated from the fiscal first quarter, growing 8.7% year-over-year in the second quarter due to a very strong finish and favorable calendar.
We have consistently grown our market share in the independent restaurant space, which remains an important component of our long-term profit growth aspirations. The increased head count within our sales force is certainly an important factor. However, I cannot overstate the quality of these individuals and the hard work they contribute to PFG every day. Their performance is supported by our company's rigorous training, emphasis on product knowledge and the development of relationships. PSG has been building and maintaining this area of our business for decades. In our view, the synthesis is a key driver of our independent performance, and we expect this to provide continued momentum in the quarters ahead.
As we have discussed in the past several earnings calls, new account growth has been the main driver of case growth in the independent channel. This largely continued in the fiscal second quarter with active independent customers increasing by nearly 8% over the prior year. However, we did begin to see improved penetration within existing accounts, particularly in November and December. In fact, sales to existing customers increased more in December on a year-over-year basis than we have seen since January of last year. We are optimistic that growing business with our existing customers will become a more important piece of our case growth trends.
Last quarter, we highlighted the sequential performance of our chain business, and we're optimistic that we could see positive case growth over the next several quarters. We are pleased to see that chain business continue to accelerate sequentially between a positive case growth in the fiscal second quarter. The growth in our chain business was mostly driven by improved performance of our existing customers with a small contribution from new accounts.
As you are aware, we have produced several excellent results in our Foodservice business despite several quarters of deflationary pressure. Sequentially, deflation moderated in the fiscal second quarter compared to the fiscal first quarter as we had expected. While the moderation was slightly less than we had originally anticipated, our strong case performance and positive mix shift offset the deflationary pressure, resulting in gross profit improvement in the quarter.
As we turn our attention to the back half of 2024, we continue to expect moderating deflation turned very slight inflation by the time we reach the end of the fiscal year. We are extremely proud of how our Foodservice business has performed and believe it will continue to be the engine for our profit growth over time.
Turning to Vistar. We were very pleased with the results in the fiscal second quarter. Vistar is an important growth engine for our company and has consistently produced strong top and bottom line results. As we discussed on last quarter's earnings call, Vistar did have a difficult comparison in the fiscal second quarter due to higher than typical inventory holding gains last year. They were able to successfully overcome this hurdle and grow bottom line results in the period.
One of Vistar strength is the ability to compete in a wide variety of channels selling a broad range of products. This diversity helped once again in fiscal second quarter, allowing the segment to produce high single-digit sales growth. Vistar saw particularly strong sales results and the important vending, office coffee and office supply channels. One of the key drivers of the top line performance was the continued improvement of fill rates, both inbound and outbound. As you may remember, Vistar still rates have been slower to recover in our Foodservice business, and we are pleased to see gains in this area recently.
Vistar has continued to enhance their e-commerce platform, which we believe will offer further growth potential in this channel, enable us to increase sales to existing customers as well as open new lines of business directly to consumers. Vistar has a strong pipeline of new business and we are excited about the future.
Finally, our convenience business has powered through a difficult macroeconomic environment to produce very strong bottom line results. On the top line, our Core-Mark operations continue to win new business and outperformed the broader C score landscape, particularly in the largest and most important channels. In particular, Core-Mark has been able to outperform in the food service and in snack areas of the convenience business. While top line growth is not quite as robust as we might like, Core-Mark has shown their ability to win market and take share from competition. We believe that inflationary pressure, both inside the convenience store and the gas pump has kept consumer demand unit over the past several quarters. Over time, we expect this to normalize and allow top line trends to revert to historic growth rates in the convenience space.
Meanwhile, Core-Mark has done an outstanding job capturing efficiencies on the operating income line, particularly in workforce productivity. Core-Mark's operating expense efficiencies are attributed to record low temporary workers and overtime expense, which has decreased by approximately half from Q2 of 2023. A stable full timing workforce, as several long-term advantages, including fewer picking errors, lower levels of shrink and higher worker productivity. As a result of these efficiencies, the convenience segment experienced 20% adjusted EBITDA growth in the quarter. This profit performance is despite lower inventory holding gains on a year-over-year basis.
Through the remainder of fiscal 2020, we anticipate inventory holding gains to moderate to a normal level. Still, our Convenience segment's profit momentum is strong due to the excellent management of underlying cost items. Core-Mark's ability to deliver both traditional convenience store groups as well as broadline food service expertise and capabilities has enabled us to capture additional business opportunities since the acquisition.
We have expanded our capabilities to incorporate additional branded concepts, including various cuisine types such as Hispanic fried chicken and barbecue. We have used a strong brand equity in several of our performance brands, including Contigo, Perfectly Southern Fried Chicken, Red Seal Pizza and [ True-Q ] barbecue. We believe that these programs help to drive our strong sales pipeline and expect them to result in additional business in the years ahead.
Before turning to Patrick, who will discuss our results and specific drivers or performance and then provide more color on our guidance for 2024 and beyond. I want to leave you with a few key messages from our second quarter results and expectations for the future. We believe that PFG's position as a leader in the growing food away-from-home market will enable us to consistently grow our sales and profit over the long term, resulting in additional shareholder value.
Our commitment to invest in new fiscal capacity and customer-facing employees has produced market share gains in the highly profitable channels in which we compete. Our broad channel exposure gives us access to significant white space opportunities that we believe insulates our business from changes in the external macroeconomic climate. We are excited for what the future holds and appreciate your interest. I will now turn it over to Patrick.
Thank you, George, and good morning, everyone. I'd like to start this morning by reviewing our financial performance for the fiscal second quarter of 2024 and commenting on PFG's financial position and capital allocation priorities. I'll then review our outlook for the remainder of fiscal 2024 and discuss some key drivers embedded in our guidance. We'll then be happy to take any questions you have during the Q&A portion of the call.
As you saw in our press release this morning, PFG delivered strong results during the fiscal second quarter, building on the momentum from our first quarter. We were particularly pleased with how we closed the calendar year during the important holiday selling season, which experienced accelerated growth.
In the fiscal second quarter of 2024, PFG generated total net sales of $14.3 billion, a 2.9% increase year-over-year. Our revenue was at the upper end of the guidance range we laid out last quarter, and we are very pleased with this result. Our sales performance was driven by a 2.1% increase in total case volume growth. Our case performance was boosted by an acceleration in independent restaurant case growth, which increased 8.7% in the quarter. This result was more than a full percentage point higher than the prior two fiscal quarters. highlighting the solid momentum in this area of our business.
As George mentioned, we attribute this strength and resulting market share gains to our investment in our growing outstanding sales force. I'm also pleased to report that case volume to chain restaurants grew in the fiscal quarter after several consecutive quarters of decline. As we discussed in our last earnings call, our chain performance had improved sequentially as a result of improvements in some of our key accounts and new business wins. It is rewarding to see this area of our business move back towards positive growth, creating a powerful combination with our independent strength. We expect to continue to add new accounts to our chain business, emphasizing profitability as we partner with strong and growing restaurants.
Total PSG gross profit increased 6.6% in the fiscal second quarter to $1.6 billion. Positive mix shift continues to drive gross profit growth and margin expansion for PFG. While deflation in food service moderated in the second quarter compared to the first quarter, it remains a modest headwind. Our gross profit performance in the quarter once again reflects our ability to produce solid profit growth despite the deflationary backdrop. Total company inflation increased slightly in the fiscal second quarter due to moderating deflation in the food service segment that I just mentioned, this offset the slowing rates of year-over-year inflation at both the Vistar and Convenience segments.
Public company product cost inflation was 3.6% in the fiscal second quarter, up 0.5 percentage points sequentially from the fiscal first quarter. Deflation in the Foodservice segment moderated to 0.4% in the fiscal second quarter compared to 2.3% deflation in the fiscal first quarter. As expected, Vistar inflation continued to slowly trend lower in the quarter, though it remains elevated compared to historic norms. Vistar finished the second quarter with inflation just below 7%.
The convenience segment is experiencing a similar dynamic with 7.5% inflation in the fiscal second quarter. Looking ahead, we continue to expect food service deflation to move toward inflation by the end of the fiscal year, with Vistar and convenience inflation settling in at a more normal low to mid-single-digit range. These are the assumptions in our fiscal 2024 guidance.
Gross profit per case was up $0.29 in the second quarter as compared to the prior year's period. Our ability to increase gross profit at this rate is an important factor in our bottom line growth. You will see in our earnings release, our operating expense did increase at a mid-single-digit pace in the fiscal second quarter. This increase was mostly due to higher personnel expense and an increase in insurance costs. Higher personnel expense is partly a factor of our larger workforce to match our increase in demand. These increases were partially offset by increased productivity. We expect these improvements to continue in future periods as we steadily capture opportunities to become more efficient, particularly in the areas of warehouse and delivery.
In our second quarter, PFG reported net income of $78.3 million, a 10% increase year-over-year. Adjusted EBITDA increased nearly 12% to $345 million. Our adjusted EBITDA result was at the very top end of the guidance we provided last quarter. Diluted earnings per share in the fiscal second quarter was $0.50, an increase of 8.7%, while adjusted diluted earnings per share was $0.90, an 8.4% increase year-over-year. We did see a higher effective tax rate in the fiscal second quarter of 29.9%, which is due to an increase in nondeductible expenses and state and foreign taxes as a percentage of our income.
Turning to our guidance. For the fiscal third quarter of 2024, we expect net sales to be in the range of $14 billion to $14.3 billion and adjusted EBITDA to be in a range of $310 million to $330 million. Keep in mind that the fiscal third quarter is typically the smallest quarter in our fiscal year due to relatively light industry volume in January and February.
A couple of thoughts on the assumptions we have applied to our fiscal third quarter outlook. First, as expected, the Foodservice segment continued to experience mild deflation in the fiscal second quarter. We continue to expect this deflation to move towards flat during the fiscal third quarter, although the pace of this improvement may be a bit slower than we originally anticipated.
Second, while we closed out our fiscal second quarter with significant momentum, Bad weather in early January resulted in an impact to our volume and sales results. Typically, January is a very small month, so we do not believe that the weather will result in a significant impact to our full third quarter However, we are mindful of the slower start to the calendar year than we had originally expected.
Despite these challenges, we are reaffirming our full year fiscal 2024 guidance. We continue to expect net sales to be in the range of $59 billion to $60 billion and adjusted EBITDA to come at the upper end of our previously announced $1.45 billion to $1.5 billion range. We are currently tracking sales at the lower end of the $59 billion to $60 billion range. So we do expect to have a strong fiscal fourth quarter. We are also reiterating our long-term outlook which projects net sales to be in the $62 billion to $64 billion range in the fiscal 2025. Adjusted EBITDA is expected to be comfortably within the $1.5 billion to $1.7 billion range in fiscal 2025.
As you can see from our outlook for the next two fiscal years, we are confident in PFG's current trajectory and believe that our business is on solid footing.
I'd like to conclude our prepared remarks today with our financial position, including our cash flow generation balance sheet and capital allocation priorities. Over the first 6 months of the fiscal 2024, PFG generated strong operating free cash flow. Operating cash flow was $554 million in the first 6 months of fiscal 2024, an increase from $424.5 million over the first 6 months of fiscal '23 due to improvement in our working capital and higher operating income. After investing about $147 million in capital expenditures, PFG generated $406.9 million of free cash flow. Investing in our business remains the top priority, including growth projects to build additional capacity to support our long-term growth aspirations.
After capital expenditures, we have three main uses for our additional cash flow, including M&A, leverage reduction and share repurchases. We evaluate these decisions based upon the value we see each would create for our shareholders and strategically deploy capital towards this view. Our share repurchase program considers the value of our stock as well as the relative valuation compared to historic levels.
In the fiscal second quarter, PFG repurchased 0.8 million shares for a total of $50 million for an average cost of $58.01 per share we are confident in our long-term prospects and reflect this through share repurchases. We also continue to look at strategic M&A as another avenue of shareholder value creation.
We are proud of PFG's track record completing and integrating acquisitions throughout our history. The team is continuously working to identify interesting opportunities while remaining disciplined on price and strategic fit.
Finally, we have focused our efforts on maintaining a healthy balance sheet. We closed the quarter just below the midpoint of our 2.5 to 3.5x net debt to adjusted EBITDA target. We feel very comfortable in this range. We also carefully consider the balance between fixed rate and floating rate debt and use interest rate swaps to convert a portion of our ABL balance to a fixed rate at the close of the fiscal second quarter of 2024, 80% our total outstanding debt was at a fixed rate, including these swap contracts. We believe that our current level of debt provides ample flexibility to fund our ongoing operations while leaving room for the capital allocation priorities I just highlighted.
To summarize, PFG finished calendar 2023 with a strong fiscal second quarter. We believe our business is well positioned to achieve strong results despite changes in the macroeconomic environment. and we are investing in the long-term success of our organization and our shareholders. Thank you for your time today. We appreciate your interest in Performance Food Group. And with that, we'd be happy to take your questions.
[Operator Instructions] And we do have our first question from Jake Bartlett with Truist Securities.
My question was on the cadence of the sales and the EBITDA guidance in the third quarter and the fourth. You mentioned weather, but you also mentioned that it wasn't going to have very large of an impact given how small January is. So the question is what gives you so much confidence that sales growth will accelerate in the fourth quarter? By my math, it's about 6% growth at the low end of guidance in the fourth quarter, up from, call it, 2.5% to 3% in the third. So what gives you confidence in that level of acceleration?
Well, momentum in our independent business is a big help. We have new business coming in, in our national account area that starts anywhere from the beginning of the fourth quarter and some of it starts in May. And the same in our Core-Mark business. We have some new business that we've already signed up and we know is coming in. So those are the things that give us confidence as we get into the fourth quarter.
Okay. [indiscernible]...
Sorry, Jake, I was just going to add, what we're really trying to do is make sure that we gave you guys some clarity on the cadence of Q3 to Q4.
Got it. But the third quarter is impacted by weather, but not by much. Is there any way you can kind of quantify how much just you've seen in January, it's done. How much of an impact do you think January was to the quarter as a whole?
Well, January was a significant impact. I mean it was a slow month. We're glad to be doing this quarter having week in February under our belt once we got past the bad weather, which is really just California now, things were right back to normal. And our case growth was back to normal. So we've got 9 weeks to make up for a difficult 4 weeks, but we want to communicate that does have an impact on our third quarter, but March is so critical to Q3 that we don't have full insight into what impact it would have on us. January is always below EBITDA a month for us.
We do have our next question from Mark Carden with UBS.
So I wanted to dig into Convenience a bit. You mentioned that you're taking share there, both overall and in Foodservice. Still cases in Convenience, Foodservice were down I'm curious if this would have been positive if you include the Foodservice sales that are embedded within your Performance Foodservice business. And then...
Yes, it would have been a 6.3% case increase, if you include the food service.
Okay. Great. Okay. Are you seeing much of a change in consumer behavior as gas prices have moderated a bit?
I think it's too early to tell with that because it's pretty recent that it's -- we've had that moderation and we've had the weather component to deal with there. At least if you look at it historically, we're going to see some positive impact from that. Where we're seeing the softness is one large account that is very soft. And the Monday and Friday morning traffic is still not quite back to norm. I think it's because a lot of people aren't working a 5-day weaker going into the office for all 5 days. But other than that, we see some good success.
And then it has a long sales cycle, which I've mentioned several times, convenience in general. But in the Foodservice, where there are branded programs, those are typically fairly long contractual arrangements in maybe 3 years and maybe 5 years. So with our turnkey programs that I mentioned in the prepared remarks are Perfectly Southern chicken, or [ True-Q barbecue ], those type of programs. Where they're not doing something like that, we're getting quick where they have to change out signage and they're doing that with somebody else who maybe had a 3- or 5-year agreement. Sometimes those are going to be 6 months, 12 months before they're actually up and going. But what we do is we keep track every month with how many new programs that we've signed up. And we just feel real good there. Even the month of January, where it was difficult to get those things done, we did sign up a significant amount of customers. So our Foodservice business and the Convenience site we're real pleased with where we're at, at this stage of the game.
Okay. Great. And then as a follow-up, just you talked a bit about the potential for strategic M&A. You mentioned recently that Foodservice would likely be the primary focus there. Just anything that you've seen recently that would make you any more or less optimistic at the volume of potential deals. And then if you did add within food service, do you have any order of preference just between bolt-ons, category additions or white space? Or is it simply looking at the highest return?
Yes. Well, we're always looking at white space. It's important to us. We've spent a lot of time on capacity in the West Coast or the whole West actually. If you look at our company from a broad line standpoint, west of the Mississippi, we really only had one, and that's in Northern California, and that's actually our smallest broad-liner in the country. So we get our monthly share information, which we think is fairly accurate and it's got all of the large players. Our shares are very low in the West. And very high in the East and continue to get better in the East. So we need that capacity in the West, and we're adding capacity as opposed to acquisitions where we feel like maybe acquisitions won't be available. And there's other potential ones that we have. We don't really look at bolt-ons or fold-ins, it's just not something that makes a lot of sense for us right now.
And we do have our next question from Edward Kelly with Wells Fargo.
Maybe could we start on the independent side? I mean, obviously, you saw a nice acceleration in independent case growth, strategy is clearly working there. It does seem like there's a competitive backdrop is maybe intensifying a bit just from the standpoint of the amount of focus there is on driving independent case growth. Can you just talk about what you're seeing competitively?
And then looking forward, how do we think about the right pace of growth for this business for you over time? I think it was in 2019, you talked about 6% to 10% growth. That was kind of a target for a long time. Is that a reasonable target as we think about the coming couple of years? Just thoughts there would be great.
Yes, we'll start with the competitive nature of the business. I think it's always been very competitive and independent. I've never seen a time where it wasn't as far as being more competitive than normal, I don't really hear that from our people. So I would just say that it's a very competitive business, and it's as competitive as ever right now, but not necessarily more so.
As far as pace of growth, I think the 6% to 10% is something that we still want to hang our hat on. We're doing that right now with in excess of 7% new customers, and we're doing it with about an 8% increase in salespeople. And we're starting to lap last year we got that busy post COVID adding salespeople.
So that number is probably going to come down as far as year-over-year, but these people have gained more experience they're doing better, and we look to having a higher case growth than we have growth in salespeople. But 6% to 10% is still something that it's ingrained in our people. And we're not at a point where we want to back off from that.
And just as a follow-up, you mentioned this in the convenience business, this notion of elasticity and the demand destruction that's caused by the inflation. And I have to imagine that we've seen that probably across business has been a lot of pricing in all of these businesses. Pricing is easing generally, do you think that the industry has an upcoming benefit coming from, let's call it, like normalization of underlying demand as inflationary pressures normalize. You've been putting up very solid growth, obviously, in a backdrop where I don't think the industry is growing very much.
Well, we see that in the share reports that we get, and that's what gives us confidence going forward is we're doing a better and better job of gaining share. I mean it's 1/10 or 2/10 more than, say, the previous increase in share that we had in the previous year, but that's a lot and is the size that we are. And with shares, I guess, to a degree as low as ours are. As far as pricing goes, I think a lot of people overshot with the pricing and to some degree, I don't blame them, that we're facing a lot of issues with food inflation and not just food, but rents going up, utilities going up. I mean everything was going up.
What we're seeing now is a lot of people are not backing off on their menu prices, but there's just a lot of promotional activity that's going on. Another sign that I think things are going to start to calm down January in our Vistar and our Core-Mark business are typically a time where people increase prices, and they certainly did a year ago, January. And what we saw this January was a lot of people did not take their normal price increase, and we saw a step down in inflation from December to January, more about prices going up last year and not going up this year than anything coming down.
So I don't know. I mean, I just don't see people that -- I just don't see people reducing their menu prices. I think that it will be more like kind of hanging on where they're at now. and promoting heavier.
And just quickly for you, George, you mentioned an improvement off of a soft January on weather. Any additional color there?
It was a normal week for us as far as percentage increase over the previous year and January certainly was not. And there's another factor with it, too. the calendar really helped us at the end of Q2, particularly the last week, and it hurt us the first week of Q3. So that's another factor with it. Now it's a very low volume week anyway. So when you spread that over 13 weeks and certainly over 52 weeks, it's not real material. But I don't see any change in the industry. I really don't -- it's hard when you look at numbers like that. But when you look underneath things, it looks fine to me. I think the demand is still out there.
And we do have our next question from Kelly Bania with BMO Capital.
Just wanted to follow up a little bit on convenience. George, I think you talked about 6% growth there if you include the cases that go through Foodservice. I'm assuming that's mostly just Foodservice type product.
It is entirely Foodservice.
Entirely Foodservice, okay. But can you just talk a little bit about the appetite for chain and independent convenience stores to kind of make that conversion, and you talked about the turnkey programs. But just in this cycle where maybe there is maybe a little bit of softness, what is that appetite to make that transition? And then can you also elaborate on the new business wins you sort of touched on?
Yes. I think the appetite is high. I mean certainly, the tobacco side of their business is going to continue to slide and they have to have something to replace those gross profit dollars that, that creates. And I think Foodservice is the best way for them to do that. And I'm really enjoying watching how many of these programs were getting into places that didn't do food service before. Where they're finding space in that store that isn't giving them the return that it used to give them and putting Foodservice products in to take us place. Now typically, there's equipment involved there. The signage involved there. So it does take a good bit of time.
As far as the new business goes, we have several things that we'll have starting in the next 6 months. Often it's a situation where you have to wait for that contract to end. In some instances, the current supplier has been notified and some they haven't. So that's not our job to do that. So we don't talk specifically about any piece of business. But we have great confidence in our future growth within our convenience area.
Okay. That's helpful. Maybe I'll just tack on another one on Vistar here. I think you said the inflation was just under 7%. So it looks like maybe cases were just slightly positive. Can you just elaborate on the channels that maybe are growing or not? And just maybe as you think about case growth for Vistar into the back half?
Yes, Kelly, this is Patrick. I'll take that one. So on Vistar, the channels where we saw some really nice growth in Q2, we're in vending office coffee, office supply theater was a relatively soft quarter for them, just not a lot of content out there. But as we go forward and looking at the back half of the year, again, they had a really strong quarter given the fact that they were comping some inventory gains in Q2. We don't expect that going forward. But the channels that we see growing, they always have a relatively off January as well and then things start accelerating for them. So we do expect most of their channels to show some nice positive growth for the balance of the year, including theater as we get into March and later into the year, with some new releases coming out and then vending and office coffee should -- well, not so much office coffee, that's kind of the tail end of the season for them, but vending should pick up quite a bit, too.
And then I would also add, Kelly, that our e-commerce business is doing very well.
And our next question comes from Alex Slagle with Jefferies.
Just wanted to touch on the chain business, national chain business. And you talked about some of the optimism that you'd see the case growth start to pick up, and it does seem like you're seeing some green shoots there. merging. Is this mostly a function of your customer mix? Or is there signs of broader strength in the full-service casual dining category where there may be flexing their benefits of the marketing voice and value out there in this environment?
Well, we do have accounts in our national account mix that have not done well for quite a while. We've seen a little bit of the bouncing off the bottom, I would say. We have some that are on a great growth path. So that mix coming together. In aggregate, they did grow, which was really nice to see. We had a little bit of new business come in. We have more that starts actually next month, and we have more of that starts in May. So we'll be putting out pretty good national account case growth, and it's all in the restaurant area.
Got it. And as a follow-up, just more broadly, the positive mix shift that you've seen across products and customer types. I mean it's been a nice tailwind for a while, and there have been internal and external drivers behind that. And we talked about some of this with the independent. But just kind of curious where you have the most confidence in seeing these positive shifts continuing and if there are certain corners of your business that might emerge is bigger or smaller drivers in the future?
Yes. Well, I see our independent Foodservice business continued to grow well, have great confidence around our Foodservice business into Convenience. E-commerce definitely a strong point for us. And as far as the mix goes, I mean, that's really been our story for 20 years. We've just always grown better in the areas that produce a higher margin. And excluding when we made some big acquisitions that maybe have a different mix of business than we have. And I think that's going to continue to be the story for us. We certainly like the national account business, and we have some great customers and some really good relationships. But that's not going to be what drives our gross margins, but some of the business is very efficient and very profitable.
And also this add because George brought up on the call, those turnkey programs go into convenience like Southern, they have a huge potential for us.
They do. And we've got some strong brands that we've developed. And it took a while. I mean, it is a different business. We had some tweaking to product. The product has to hold up longer than what you would typically sell to a restaurant. It's not what I would call absolute immediate consumption. We had a lot of work to do, and we're pretty much through that. And we just look at this as a good growth engine for us.
And our next question comes from Brian Harbor with Morgan Stanley.
Just maybe a quick one first. Is the weather impact in January more significant in any one of your three segments? Like I don't know if C-stores feels that more or anything?
It was the most significant, probably in Foodservice, convenience was very close to that this start not so much.
Okay. Understood. In the Foodservice segment, I think in the most recent quarter, your growth in gross profit and growth in operating expenses was sort of similar. Do you think that you can see kind of more operating leverage in that segment going forward. Is that kind of just a function of where you are with kind of the hiring cycle? Or what else will kind of drive the growth rates of those two lines?
Well, we see that our productivity has got much better. And we've had a good comeback there, but there's still more to be done. Actually, Core-Mark was probably affected the most going through COVID was the one that came back the fastest from an operational standpoint. They did a terrific job. So that's part of it. The hiring of salespeople, we've carried a big payroll of people that were not on commission for a period of time. We'll cycle through that. It was a good investment, glad we did it. And then the capacity that we've added when you open new facilities, there is a definite learning curve, and it's going to have. It's going to come along with higher expenses for a period of time also good investments.
And then from an IT standpoint, we've invested heavily there. We're on the path to get to one ERP, a very slow path, because that always comes with disruption, and we're pretty careful with that. And then also would be the areas I would say where our expense is higher. Certainly, insurance, which I should probably have Pat address that.
Yes. And I'll just jump in on that. So I mean, as we've talked, we definitely have seen some higher OpEx. But I do want to point out that we were able to grow gross profit faster and so it dropped nicely some nice margin expansion at the EBITDA line. When it comes to insurance, specifically, not to go into too much detail, but we are a high deductible insurer. And so we have third-party insurers that cover everything above the deductible with some limitations. But for that deductible according to GAAP, we established an accrual. And there's just been some market dynamics so this quarter, in particular, that expense was a little higher than what we expected. And that has a lot to do with how many miles we're driving. It has a lot to do with the industry and the incidents they're seeing and the severity of those incidents. But we don't expect going forward that we would have that additional expense like we saw this quarter. It was really a bit of a catch-up, and we expect to manage it going forward. But there are some things that we can't manage like we don't manage the overall industry, obviously.
Yes. And I would make the statement too. When you look at the quarter that we just reported, when you look at the insurance headwinds that we had, the inventory holding gains that we had the previous year, it was quite a quarter for us. We were really up against a lot, particularly from an inventory standpoint within Vistar. So I couldn't be more pleased.
And we have our next question from Joshua Long with Stephens.
Encouraged to hear about the growth on the new accounts side. It also sounds like you had noted maybe a reengagement of your kind of existing consumers, maybe some opportunities to drive wallet share penetration. Can you talk a little bit more about that?
Well, it's interesting when you look at the detail in the account level, there are certainly more restaurants. I don't have what the actual numbers, I don't think anybody does. But these spaces are all filling up. And it's very rare that a restaurant that goes dark that something else ends up coming in at that location other than a restaurant, very rare. And what we see is that our penetration within the account appears not to be what they would normally be for us. We typically have the ability to add SKUs to existing business. And that wasn't showing up. But then when we get to the end of the month and we run reports around the amount of SKUs that they're buying and are they not buying SKUs that they were buying a year ago. What we're finding is we're adding SKUs, but that customer was buying 14 cases of French Fries per week last year and maybe buying 11 now. I think it's because there's more competition out there and there's just more units open. So that will settle back in.
One of the things, I think, that is helping our sales at the account level is a lot of customers reduce their days and reduce their hours. And that was more, of course, around labor availability than anything. We're seeing that start to go the other way as well, where they're adding hours and their going back to six days or going back to seven days a week in which they're open. Just another one of those many things that changed during this pandemic and are gradually going back to normal state. So the fact that we're still adding SKUs to the account or the accounts in general, tells me that as the industry totally normalizes these spaces are off, then I think that's going to show up in better actual dollar or case penetration within those accounts. So that's where I see some upside for us.
Great. And then recently, you announced a pretty interesting product partnership on the premium dessert side. I'm just curious if that's something that was maybe a one-off opportunity or similar thing you could see or we should expect other opportunities down the line in terms of just being able to kind of add options, elevate product quality, but then also kind of speak to the convenience and just overall value proposition that you bring to your customers?
I think if there's an area that we'll do more of that, it will probably be in the convenience area. But the arrangement that we did -- it's just a high-quality manufacturer. We're making sure that our specified product that they're using their products so that we can then market their brand alongside of ours. It would be great if we could do that in more areas. I think this is probably not a one-off, but it's certainly not a new strategy.
Got it. That's helpful. And then last one for me. When we think about kind of segments where you've had an opportunity to drive continued growth and you already have a leadership position in micro markets is something that we've talked about on prior calls. Curious if you could just provide an update there in terms of maybe the kind of in consumer end customer moving towards and building out that micro market business as we think about kind of a normalization and the return to office and work environment.
Yes, Josh, this is Patrick. Micro markets just continue to grow. The technology gets better and less expensive. So for the checkout and the opportunity to provide just a much broader selection, you can bring in refrigerated frozen hot and then all the different types of candy, snacks and beverages in all different sizes. So there's just a lot of attractive things to it. So as the operators that Vistar works with, to sell that into office spaces, they just have the opportunity to really expand upon what they've had in the past. And we see just continuing to grow and they continue to either create new spaces for mark-to-market or they replace old vending banks and put in a micro market. But either way, it's a net positive because of all the additional SKUs and categories that can add to that market.
Yes. We've also had places where they had an employee cafeteria in the past, shut that down during the COVID and then open back up as a micro market as opposed to a tray line type situation. And that's great for us because we really don't play in most of the noncommercial areas of our business from the Foodservice.
And we have our next question from Jeffrey Bernstein with Barclays.
Great. Two questions. First one, just the -- I think you mentioned strong and accelerating sales growth to close fiscal 2Q. And I know you mentioned into the holidays, obviously, early fiscal 3Q hit by weather. But besides weather, are you seeing any change in the macro and your Foodservice accounts within the Foodservice segment? Or do you think it's purely weather? I know some people have talked about maybe a slower macro in recent weeks or months. I'm just trying to get your sense how you decipher between weather and perhaps a slowing macro. And then I had one follow-up.
Yes. Well, we only have the one week coming out of the weather and that was very normal. So I mean, that's a good sign, but it is only one week. And certainly, in Q2, at the end of Q2, we were helped by having a 5-day ship week versus a four of the previous year, so that helped at the end of the quarter. I don't really see a difference I don't know that I can say that three weeks from now. But right now, we look at what happened in January as a blip that was weather-related.
Great. No, that's encouraging. And then George, I think you just mentioned in terms of restaurant boxes, I feel like from COVID, a lot of people came to a consensus that maybe they were 10% fewer restaurants or 10% closed through COVID. And for a while, it sounded like those boxes were not necessarily filling that month after month, maybe somebody would come into one, but there was another that was emptying out. So in the end, you weren't seeing a net recovery in terms of the number of units. But I think you mentioned that it sounds like maybe you're now seeing those empty boxes filling up. So I'm just wondering, I know you said it's hard to find good data. So for sure, it's much harder for us than for you. But where are we in terms of the recovery back to the prior peak restaurant count? Just trying to get your sense for those boxes filling back up again, which is petty good for everybody.
Yes, that's hard to tell. I can say that in my travels, I don't see many empty restaurants any longer. I probably wouldn't have said that even 6 months ago. So I think they're filling up I look at our number of accounts, and we're so far ahead of 2019 as far as number of accounts, particularly independent restaurant accounts. I think that for the health of the industry, I hope that we don't get overbuilt again. But I think we're in a pretty good spot.
Actually. Just lastly, the independent segment, I know you mentioned it's always competitive and you continue to invest in your sales force, I think you mentioned it's up 8% year-on-year. It sounds like some of your peers are perhaps more aggressively doing something similar. So I'm wondering whether you're finding any incremental challenge finding good labor or increased turnover or anything that's making it harder for you to pursue what you've always done because other players are now getting more aggressive going after similar independent sales people, perhaps.
Yes. I would say that -- as I said earlier, I don't think the market is any more competitive now than it has been. And I think the large players are going to benefit. And our challenge and our mission is to benefit more than the other guys, I guess. But it's a good industry, and it is continuing to consolidate. And I think there's a lot of room for a lot of people in this type of business.
And we have our next question from Lauren Silberman with Deutsche Bank. .
A couple on guidance. I think you said the fiscal year is checking at the low end of the $59 billion to $60 billion range. As you look back, is this entirely driven by lower inflation than you would have expected anything else a little bit different than expectations.
Lauren, this is Patrick. It is due a little bit to that, and it's also due to the fact that we've been speaking for several quarters about our beliefs on what deflation in food service would do when inflation would do in Vistar and convenience. Deflation in Foodservice has just been a little slower, as I mentioned in my comments, to move the direction we wanted to. It is moving in the correct direction. It just hasn't gone to inflationary, and we would have expected that to happen a little sooner. So it doesn't change dramatically, but it did impact us a little bit there. And then we've already touched on the January effect as well.
And the big one for us from a deflation standpoint is cheese, particularly cheese that goes on a pizza. And we greatly over-index in that area and the way in which we run our business where many of our customers, our agreement with them is over the block market as far as how we price them. And often, we've done well from an inventory standpoint by anticipating price increases and anticipating deflation and making sure our inventory is as well as possible during deflationary times in the size possible to inflationary times within that category.
But once again, [ with cheese ], the way we run our business where the age that we put on the product is extremely important to us. And we have just been taking those losses on the inventory as cheese has continued to go down in price. And we finally have seen that turn the other way. And we've had a few weeks in a row where the block market has gone up. So that's going to be a positive for us if that continues or even stabilizes. But I think that's a part of this $59 billion to $60 billion.
I think another part of it is that cigarette volume typically goes down at a rate of about 4%, and it's been higher. Which is fine. That's just big dollar sales that don't come with a lot of profit, but something you have to be in the business we're in. So that contributes to it. And I think that's probably about it.
I think so, yes. .
Great. Super helpful. Clarifying just the second half guide, the fiscal third quarter, and I know we talked about January installation, to what extent is -- are you guys embedding like more of a return to normalized seasonality, and this is a function of cadence just given you reiterated the full year guide versus some of these more idiosyncratic impacts in the fiscal third quarter?
Yes. I think it's a lot of that of us trying to just help give some cadence to the quarters and give you that ability to understand the cadence that we're seeing. So it's much more what you described the former than the latter.
Great. And then just last one on the fiscal '25 guide, fiscal '24 come in at the low end of the fiscal '25 guide. Could you just help frame a little bit how we should be thinking about fiscal '25?
Yes. I mean we've continued to reiterate that guidance. And I think we've said that we feel really comfortable about coming in right in the midpoint of that guidance. So I think we continue to see really positive things, and that's why we continue to reiterate that particular guidance.
And our next question comes from Andrew Wolf with CL King.
I wanted to ask on the -- your commentary that the penetration with independent customers is improving. Maybe could you elaborate a little bit on like what parts of the sales process is being applied. Is it differentiation service? Are there pricing algorithms that maybe they get more confidence with? Just help us understand why that's happening.
Well, we don't have pricing algorithms. So that wouldn't have anything to do with it. We train our people, and we train them to be equipped with the best product knowledge possible and Therefore, they have the knowledge as us to those accounts. And Andy, it's really no more complicated than that.
So would you call it basically persuasive selling and showing up that kind of a combination?
Yes.
The other question I really wanted to get into was the better operating expense much better the convenience store distribution business, and just by what you're detailing temporary help and overtime, I wasn't sure if that's better results relative to the other two segments, Foodservice and Vistar or whether they're actually lagging maybe because there's a lot of suffer to hire people so they had to hang on to over time and temps longer. I'm just trying to get a sense of is it really a better performance? Or is it more sort of -- they're just catching up in terms of kind of getting back to having hiring up full-time folks?
Well, they would tell you, and it certainly shows in their numbers from an operational standpoint, they're fast right now than they've ever been to putting out really good levels of service and they're paying people well and getting good productivity for what they pay them. And I just think it's a real good situation. They were very focused on it. Certainly hit the hardest. And as I said, they came back the fastest and they came back to pre-COVID levels. and continue to improve. It's just a real good situation, and we need that. We've got business coming on. We've got to be prepared for it, and I think we're in great shape as that comes in.
The only thing I'll add is just specifically speaking to the warehouse and not to oversimplify things, but the type of worker that we have to hire, especially in food service, George refers to as industrial athletes. They have to be very physical. Again, not trying to oversimplify, but on the convenience side, a lot of times they're picking etches or small tax. So it can be a less demanding job and, therefore, might be a little easier to fire for us. So I think that's helped them in their ability to really drive that OpEx lower.
Good. Yes. I was going to ask that sort of structural kind of question. How about on service rates, expectations by the customers, can convenience get a little more aggressive not having excess labor because maybe their customers are a little more tolerant of stock, a lower service level? Or is it more what just patches that?
No. I would say mostly opposite the convenience customer, they don't have any like real back stock. So if we're not making deliveries and providing great service levels, they're going to have empty shelves. And so no, they have to be really good at that service level.
And we are seeing some improvement on the inbound and for whatever reason, the convenience and the Vistar suppliers just have not been able to get their service levels back to pre-COVID. And in Foodservice, we've seen people get back to pre-COVID service levels and fill rates.
And we do have our next question from Peter Saleh with BTIG.
Great. So I want to come back to the comment around some of the operators adding hours and days of operating days. as labor returns to more normal. Is this a more recent trend that you're seeing in the fiscal second quarter? Or has this been kind of going on for several quarters now? And maybe can you just help us and comment on day part mixes? What are you seeing maybe by lunch and dinner? And are there specific cuisines that are kind of outperforming given this dynamic?
Well, what I've seen as far as people expanding hours again and adding more days, I think that's a function of how they've gotten labor back. And that's different market by market. But I'm just seeing it as a trend, it's, I think, helping us.
As far as cuisines and how they're doing, certainly no expert on that. But I can tell you what I see, first of all, is third-party delivery has made delivery much more than pizza and Asian food. And I think it's been good for a lot of restaurants.
Now when we look at the SKUs that we have that lean towards takeout and delivery, it certainly isn't as high as it was doing COVID, but it's higher than it was pre-COVID. So that in itself tells me that people did change their behavior somewhat. And that product that is conducive to take out and delivery is probably benefited in restaurants that do take out and delivery have benefited. I'm not so sure I see a big change in general for what cuisines people eat. I think there was some fatigue around pizza, and that seems to kind of cycle back out. And then I would also say that some of the areas where they overshot on pricing that has resulted in some softness. And also pizza in that, too. Now breakfast has come back strong. And I think that's a function of people working and working in the office, and it's a very -- breakfast is very habitual. And they're back going to at least the ones that we supply that have a breakfast it's really made a nice comeback.
That was very helpful. Just on the Monday and Friday, I think you also mentioned Monday and Friday morning traffic. It was still I believe soft. Was -- is that something now with your comments on breakfast, are you expecting that kind of to improve in calendar '24 as more return to office is happening?
Yes, [indiscernible] morning.
[Operator Instructions] our next question comes from John Heinbockel with Guggenheim Securities.
So guys, I wanted to start with Vistar, right? And I know you referenced in the release, particularly on SG&A, right? The impact of an acquisition, which I think was Green Rabbit. Maybe for Patrick, impact on the P&L, is that a near-term weight? And then maybe for George, strategically, right, Green Rabbits impact on Vistar in particular the fulfillment business, what does that do? And can that move the needle in that business?
Yes. Thanks, John. There's a couple of things going on the start in the quarter, just to highlight them. I mean, obviously, we've added the acquisition and that is showing up in OpEx. And then the thing that's not really obvious or maybe you figured out that it's just the gross profit looks muted because of those inventory gains in the prior year versus this year. So if you were able to strip out those gross -- the inventory gains from last year and the acquisition, the gross profit to OpEx, it's still growing about double Vistar. So we're really comfortable with how Vistar is performing. You're just getting a lot of noise at that acquisitions getting added into the P&L, and you have that year-over-year comp from inventory gains. I'll turn it over to George.
Yes. From a strategic standpoint, I mean, this the whole e-commerce area is something we've been at for quite a while. We were doing it out of several of our Vistar facilities for a few years. And at [indiscernible] ran the Vistar business, and his idea was to go to something that semi-automated we had enough volume where we didn't need the benefit necessarily of the Vistar business to bring the product in and truckloads. So we did one and then we did two more of the semi-automated facilities and the like $30 million pops. So they're very expensive to do.
So we talked to the Green Rabbit people for a long time. They have three distribution centers as well, like we do. Two of them are smaller than ours. One is actually quite large, but the larger one also does refrigerated and frozen, which we don't do in an e-commerce standpoint. Now we have the right temperatures to do chocolate, but not for refrigerated and frozen product. So for us, it takes us to six that gives us the ability to do those other two product areas. And the expertise that we're getting with the people that run that business is exceptional. And the products, they all hit the suppliers in which we buy from.
So from a strategic standpoint, it's a big one for us, and it's really important. And we had gotten those three centers to where they were actually from an EBITDA margin standpoint. More profitable than a regular Vistar distribution center. Now part of that, as I've mentioned before, too, is that we don't take physical possession of all of the products. So in some of it, the margin and the sales are the same. We don't have the cost of goods. So that obviously helps. But this is -- it's a big part of our future within Vistar.
Great. And then maybe a follow-up, just quick on Foodservice, right? Do you think -- is this business still -- because I think you'd argue, right, that if you're growing independent case growth, 6% to 7% with a little inflation, right, and a little chain business growth. This is a high single-digit EBITDA growth business. Would you still agree with that? And we haven't been there because of the sales force investment. Do we get back there in the early part of fiscal '25 or no, you think?
Well, we have eight distribution centers, which are strictly restaurant chain distribution centers. So they're not going to put out those kind of profitability. We know the business. We know what the profit levels are. We make acquisitions where we are full broadline company, we have very good EBITDA margins, where we are not, and we have a blend of chain business, and we have a large volume of cheese business, which comes with high 70s, 80s, sometimes over $100 cases, you're not going to make those kind of margins.
But for us, I think the biggest thing to follow with us is that we're going to continue to lower EBITDA margins within that business, particularly where it's a broadline facility. And we're going to continue to invest like we have invested, not to the degree we have lately. And we just felt like we were going to get our independent growth back up to kind of where it was pre-COVID. And we were going to invest against that and make sure that we got that done. And I see our Foodservice business getting as far as a return on sales getting more and more profitable.
And we have no further questions on the queue. That will conclude our Q&A session for today, and I will turn it back over to Bill Marshall for closing comments.
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