Performance Food Group Company Reports First-Quarter Fiscal 2017 Results

Performance Food Group Company Reports First-Quarter Fiscal 2017 Results

Continued Momentum in Independent Restaurants Case Growth

First-Quarter Fiscal 2017 Highlights

• Case volume increased 6.5%
• Net sales increased 3.0% to $4.0 billion
• Gross profit increased 6.3% to $511.3 million
• Net income was unchanged at $12.2 million
• Adjusted EBITDA decreased 5.1% to $76.0 million¹
• Diluted earnings per share (EPS) decreased by 14.3% to $0.12
• Adjusted Diluted EPS decreased by 4.8% to $0.20¹

Performance Food Group Company (“PFG”) (NYSE: PFGC) today announced its first-quarter fiscal 2017 business results.

“Our underlying business performed well in the quarter,” said George Holm, PFG’s President and Chief Executive Officer. “Our Performance Foodservice segment reported strong independent case growth of 8%. However, we experienced an increase in new business transition costs and corporate expenses during the quarter, leading to Adjusted EBITDA coming in below our expectations.”

Holm continued, “Our planned strategic growth investments in PFG Customized and Vistar will continue through the second quarter as we enhance our diverse business model to further provide us with significant growth opportunities in fiscal 2017 and over the next several years.”

¹ This earnings release includes several metrics, including EBITDA, Adjusted EBITDA and Adjusted Diluted Earnings per Share that are not calculated in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”). Please see definitions of such non-GAAP financial measures and reconciliations of such non-GAAP financial measures to their respective most comparable financial measures calculated in accordance with GAAP.

First-Quarter Fiscal 2017 Financial Summary

Total case volume increased 6.5% in the first quarter of fiscal 2017 compared to the prior year, with underlying organic growth of 5.3%. Total case volume was driven by an 8.0% increase in independent cases, double-digit growth in Performance Brands cases and broad-based growth in Vistar’s sales channels.

Net sales for the first quarter of fiscal 2017 were $4.0 billion, an increase of 3.0% versus the comparable prior year period. Gross profit for the first quarter of fiscal 2017 increased 6.3% compared to the prior year period, to $511.3 million. The gross profit increase in the first quarter of fiscal 2017 was fueled by case growth and through selling an improved mix of customer channels and products, specifically to the independent channel. Gross margin as a percentage of net sales was up 40 basis points to 12.6%

Operating expenses increased 9.7% in the first quarter of fiscal 2017 compared to the prior year period, to $479.7 million. The increase was primarily due to growth in case volume and the resulting impact on variable operational and selling expenses, as well as investments associated with expansion of geographies served in the dollar store channel, transition of business within Customized and the opening of a new automated retail facility within the Vistar segment. Additionally, operating expenses were higher during the quarter as a result of increases in employee medical claims, legal expenses and settlements of $4.0 million, insurance expense related primarily to workers compensation of $3.6 million and stock-based compensation expense of $3.1 million.

Net income was unchanged at $12.2 million for the first quarter of 2017 compared to the prior year period, a result of a decrease in operating profit that was fully offset by decreases in interest, income tax and other expenses. For the quarter, the income tax rate decreased 390 basis points to 37.4%. 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 EPS decreased 14.3% in the first quarter of fiscal 2017 over the prior year period, to $0.12 per share. Adjusted diluted EPS decreased 4.8% in the first quarter over the prior year period, to $0.20 per share.

EBITDA decreased 11.6% in the first quarter of fiscal 2017 compared to the prior year period, to $61.9 million. For the quarter, Adjusted EBITDA decreased 5.1% to $76.0 million compared to the prior year.

Cash Flow and Capital Spending

In the first quarter of fiscal 2017, PFG used $75.2 million in cash flow from operating activities, an increase of $49.3 million versus the prior year. The prior year included a $25 million break-up fee payment received related to the terminated agreement to acquire 11 US Foods facilities from Sysco and US Foods. The remaining increase in working capital was due to the Company’s continued sales growth and investments related to the roll out of new business in the Customized and Vistar segments. PFG’s net debt at the end of the first quarter was $1,257.7 million, an increase of $123.1 million compared to the end of the prior fiscal year. For the first quarter of fiscal 2017, the Company invested $34.8 million in capital expenditures, or 0.9% of fiscal 2017 first-quarter net sales, an increase of $17.1 million versus the prior year.

First-Quarter Fiscal 2017 Segment Results

Performance Foodservice (PFS)

Net sales for the first quarter of fiscal 2017 increased 2.9% to $2.4 billion compared to the prior year period. Net sales growth was driven by an increase in cases sold, including 8.0% independent case growth and strong double-digit independent customer demand for our Performance Brands. For the quarter, independent sales as a percentage of total segment sales was up approximately 130 basis points to 45.2%.

EBITDA for PFS increased 4.7% to $73.8 million compared to the prior year period. EBITDA growth was driven by a 6.6% increase in gross profit, partially offset by an increase in operating expenses. The increase in gross profit per case resulted from a favorable shift in the mix of cases sold toward Street customers and Performance Brands, as well as by improvements from procurement gains.

PFG Customized

Net sales for PFG Customized decreased 6.5% in the first quarter of fiscal 2017 to $867.3 million compared to the prior year period. The decrease in net sales was due to the planned exits of some customers to free up capacity for the addition of new business with Red Lobster in fiscal 2017, as well as lower case sales to some customers in the casual dining channel.

Segment EBITDA for PFG Customized decreased 46.6% to $3.9 million. The decrease in segment EBITDA for the first quarter of fiscal 2017 was due to a decline in gross profit of 7.0%, as a result of lower case volume for planned customer exits, as well as increases in personnel expenses, costs associated with upgrading a portion of the segment’s fleet and insurance expense.

Vistar

In the first quarter of fiscal 2017, net sales for Vistar increased 17.3% to $741.5 million compared to the prior year period. This increase was driven by strong case sales growth in the segment’s retail, theater, vending, and hospitality channels and by recent acquisitions.

First-quarter EBITDA for Vistar increased 0.9% versus the prior year to $22.6 million. Gross profit dollar growth of 14.4% for the first quarter was fueled by an increase in the number of cases sold. Operating expense dollar growth of 19.5% resulted from investments associated with expansion of geographies served in the dollar store channel, additional expenses related to recent acquisitions and investments associated with the opening of a new automated retail facility.

Fiscal 2017 Outlook

Based on the impact of increased new business transition costs and higher corporate expenses during the first quarter of 2017, PFG now expects full-year Adjusted EBITDA growth to be in the 7% to 9% range on a 52 week to 52 week basis and between 5% to 7% on a 52 week to 53 week basis versus a comparable 53 week fiscal 2016 Adjusted EBITDA of $366.6 million. The 53^rd week fell in the fourth quarter of fiscal 2016.

Also, due to the first-quarter results and the remaining impact of new business transaction costs and other strategic investments into the second fiscal quarter, the Company now expects Adjusted EBITDA in the first-half of fiscal 2017 to be down slightly versus the prior year. Second-half fiscal 2017 Adjusted EBITDA growth is expected to be in the mid-to-high teens range versus the second half of fiscal 2016, excluding the extra week.

PFG expects fiscal 2017 Adjusted Diluted EPS to grow in a range of 27% to 31% to $1.23 to $1.27 on a 52 week to 52 week basis versus a comparable Fiscal 2016 Adjusted Diluted EPS of $0.97.

PFG also expects fiscal 2017 Adjusted Diluted EPS to grow in the range of 24% to 28% to $1.24 to $1.28 on a 52 week to 53 week basis versus a comparable 53 week fiscal 2016 Adjusted Diluted EPS of $1.00.

PFG’s Adjusted EBITDA and Adjusted Diluted EPS outlook exclude the impact of certain income and expense items that management believes are not part of underlying operations. These items may include, but are not limited to, loss on early extinguishment of debt, restructuring charges, certain tax items, and charges associated with non-recurring professional and legal fees associated with acquisitions. PFG’s management cannot estimate on a forward-looking basis the impact of these income and expense items on its reported net income and its reported Diluted EPS because these items, which could be significant, are difficult to predict and may be highly variable. As a result, PFG does not provide a reconciliation to the closest corresponding GAAP financial measure for its Adjusted EBITDA and Adjusted Diluted EPS outlook. Please see the “Forward-Looking Statements” section of this release for a discussion of certain risks to PFG’s outlook.

Conference Call

As previously announced, a conference call with the investment community and news media will be webcast on November 8, 2016 at 5:00 p.m. Eastern Standard Time. Access to the webcast and presentation slides is available at www.pfgc.com.

About Performance Food Group Company

Through its family of leading foodservice distributors – Performance Foodservice, Vistar, and PFG Customized – Performance Food Group Company (PFG) markets and distributes approximately 150,000 food and food-related products from 73 distribution centers to over 150,000 customer locations across the United States. PFG’s 13,000+ associates serve a diverse mix of customers, from independent and chain restaurants to schools, business and industry locations, hospitals, vending distributors, office coffee service distributors, big box retailers, and theaters. The Company sources its products from more than 5,000 suppliers and serves as an important partner to its suppliers by providing them access to the Company's broad customer base. For more information, visit www.pfgc.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934. These statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources and other non-historical statements, including the statements in the “Outlook” section of this press release. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words.

Such forward-looking statements are subject to various risks and uncertainties. The following factors, in addition to those discussed under the section entitled Item 1A Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2016 filed with the Securities and Exchange Commission (the “SEC”) on August 30, 2016, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov, could cause actual future results to differ materially from those expressed in any forward-looking statements:

• competition in our industry is intense, and we may not be able to compete successfully;
• we operate in a low margin industry, which could increase the volatility of our results of operations;
• we may not realize anticipated benefits from our operating cost reduction and productivity improvement efforts, including our Winning Together program;
• our profitability is directly affected by cost inflation or deflation and other factors;
• we do not have long-term contracts with certain of our customers;
• group purchasing organizations may become more active in our industry and increase their efforts to add our customers as members of these organizations;
• changes in eating habits of consumers;
• extreme weather conditions;
• our reliance on third-party suppliers;
• labor relations and costs risks and availability of qualified labor;
• volatility of fuel and other transportation costs;
• we may be unable to increase our sales in the highest margin portions of our business;
• changes in pricing practices of our suppliers;
• risks relating to any future acquisitions;
• environmental, health, and safety costs;
• our reliance on technology and risks associated with disruption or delay in implementation of new technology;
• product liability claims relating to the products we distribute and other litigation;
• negative media exposure and other events that damage our reputation;
• anticipated multiemployer pension related liabilities and contributions to our multiemployer pension plan;
• impact of uncollectibility of accounts receivable;
• difficult economic conditions affecting consumer confidence; and
• departure of key members of senior management.

Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this release and in our filings with the SEC. Any forward-looking statement, including any contained herein, speaks only as of the time of this release and we do not undertake to update or revise them as more information becomes available or to disclose any facts, events, or circumstances after the date of this release that may affect the accuracy of any forward-looking statement, except as required by law.

Statement Regarding Non-GAAP Financial Measures

This earnings release and the accompanying financial statement tables include several financial measures that are not calculated in accordance with GAAP, including EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings per Share. Such measures are not recognized terms under GAAP, should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP, and are not indicative of net income (loss) as determined under GAAP. EBITDA, Adjusted EBITDA, Adjusted Diluted Earnings per Share, and other non-GAAP financial measures have limitations that should be considered before using these measures to evaluate the Company’s liquidity or financial performance. EBITDA, Adjusted EBITDA, and Adjusted Diluted Earnings per Share, as presented, may not be comparable to similarly titled measures of other companies because of varying methods of calculation.

Management measures operating performance based on PFG’s EBITDA, defined as net income (loss) before interest expense (net of interest income), income taxes, and depreciation and amortization.

PFG believe that the presentation of EBITDA enhances an investor’s understanding of PFG’s performance. PFG believes this measure is a useful metric to assess PFG’s operating performance from period to period by excluding certain items that PFG believes are not representative of PFG’s core business. PFG uses this measure to evaluate the performance of its segments and for business planning purposes.

In addition, management uses Adjusted EBITDA, defined as net income (loss) before interest expense (net of interest income), income and franchise taxes, and depreciation and amortization, further adjusted to exclude certain items we do not consider part of our core operating results. Such adjustments include certain unusual, non-cash, non-recurring, cost reduction, and other adjustment items permitted in calculating covenant compliance under the company’s credit and indenture agreements (other than certain pro forma adjustments permitted under our credit agreement and indenture relating to the Adjusted EBITDA contribution of acquired entities or businesses prior to the acquisition date). Under PFG’s credit agreement and indenture, the Company’s ability to engage in certain activities such as incurring certain additional indebtedness, making certain investments, and making restricted payments is tied to ratios based on Adjusted EBITDA (as defined in the credit agreement and indenture).

Management also uses Adjusted Diluted Earnings per Share, which is calculated by adjusting the most directly comparable GAAP financial measure by excluding the same items excluded in PFG’s calculation of Adjusted EBITDA to the extent that each such item was included in the applicable GAAP financial measure.

PFG believes that the presentation of Adjusted EBITDA and Adjusted Diluted Earnings per Share is useful to investors because these metrics are frequently used by securities analysts, investors, and other interested parties in their evaluation of the operating performance of companies in PFG’s industry.

The following tables include a reconciliation of non-GAAP financial measures to the applicable most comparable U.S. GAAP financial measures.

Segment Results

We have three segments as described above—Performance Foodservice, PFG Customized, and Vistar. Management evaluates the performance of these segments based on their respective sales growth and EBITDA. For PFG Customized, EBITDA includes certain allocated corporate expenses that are included in operating expenses. The allocated corporate expenses are determined based on a percentage of total sales. This percentage is reviewed on a periodic basis to ensure that the allocation reflects a reasonable rate of corporate expenses based on their use of corporate services.

Corporate & All Other is comprised of corporate overhead and certain operations that are not considered separate reportable segments based on their size. This includes the operations of our internal logistics unit responsible for managing and allocating inbound logistics revenue and expense.

The following tables set forth net sales and EBITDA by segment for the periods indicated (dollars in millions):

Performance Food Group Company
Investors:
Michael D. Neese
VP, Investor Relations
(804) 287-8126
michael.neese@pfgc.com
or
Media:
Joe Vagi
Manager, Corporate Communications
(804) 484-7737
joe.vagi@pfgc.com

View source version on businesswire.com: http://www.businesswire.com/news/home/20161108006091/en/