Performance Food Group Company
Q2 2017 Earnings Call Transcript

Published: 8 Feb 2017

[Operator:]

Good morning and welcome to the PFG Q2 Fiscal 2017 Earnings conference call. Today’s call is scheduled to last about one hour, including remarks by PFG’s management and the question and answer session. I would now like to turn the call over to Michael Neese, Vice President, Investor Relations for PFG. Please go ahead, sir.

[Michael Neese:]

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

[George Holm:]

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

[Tom Ondrof:]

Thank you, George, and good morning to all. I will take you through our second quarter financial results, including an update on certain corporate expenses that we highlighted on our last call. Net sales for the quarter increased 4.1% over prior year to $4.1 billion. Overall, food cost deflation was approximately 1%, driven by the meat, egg and produce categories. Our adjusted EBITDA declined 1.9% to $93.6 million, in line with our expectations and reflects the impact of our recent strategic investments. We are pleased to note that adjusted EBITDA improved sequentially throughout the quarter, capped by high single digit growth compared to prior year in the month of December. Net income increased 30.9% to $22.9 million, aided by a reduction in interest expense and a 60 basis point decrease in the income tax rate. Interest expense was favorable due to debt repayment using the proceeds from our initial public offering in fiscal 2016. The decrease in the tax rate was primarily the result of an increase in permanent deductions related to the adoption of a new accounting standard. Diluted earnings per share increased 29.4% in the second quarter to $0.22, and adjusted diluted EPS increased 11.5% over the prior period to $0.29 per share. Now let me take you briefly through the segment results. Performance Food Service net sales for the second quarter increased 1.8%, driven by winning new independent customers and further penetration existing customers. Independent sales as a percentage of total segment sales were up approximately 120 basis points to 43.6%. EBITDA for PFS was $76.9 million, up 4.8%. The increase was led by a favorable shift in the mix of cases sold to independent customers, further penetration of performance brands and procurement gains offset slightly by increased operating expenses as a result of case growth and continued additions to the sales force. PFG customized net sales for the quarter increased 2% to $933.5 million. Improved sales mix and higher revenue per case were partially offset by lower case volume related to the soft industry environment and the transition of customers to accommodate Red Lobster. In the first quarter of fiscal 2017, we began providing distribution solutions to a portion of Red Lobster’s restaurants, and we are delighted to have completed a successful transition a little over midway through the second quarter. EBITDA for PFG customized decreased $2.5 million to $6.7 million in the quarter, reflecting the cost of that transition as well as the cost of upgrading a portion of the segment’s fleet. Vistar’s net sales increased 11.6% to $737.9 million, driven by strong broad-based case growth across Vistar’s channels, including retail, theater, vending and hospitality, as well as by recent acquisitions. EBITDA for Vistar was down $0.9 million or 2.6%, mostly due to investments associated with the expansion of geographies served in the dollar store channel, the build-out of an automated retail facility, and transition expenses related to recent acquisitions. I’d like to also update you on certain corporate expenses that adversely impacted EBITDA during the first quarter of 2017, including higher than expected medical claims, professional legal expenses including settlements, and insurance expense primarily related to workers’ compensation. While professional and legal expenses continue to remain higher than prior year, medical claims and workers’ compensation expense abated during the quarter which, combined with lower stock-based compensation, helped contribute to a $0.7 million or 2% improvement in corporate costs compared to a year ago. We expect our professional and legal expenses to decrease materially over the remainder of fiscal 2017. Now let me turn to cash flow. During the first half of fiscal 2017, PFG’s operating activities used cash flow of $25.5 million compared to generating cash flow of $10.7 million of cash flow during the same period a year ago. The increase in cash flows used in operational activities was driven primarily by temporarily elevated inventory levels to support the roll-out of new business in the customized and Vistar segments. Additionally, the prior year included the positive impact of the $25 million break-up fee received related to the terminated agreement to acquire 11 U.S. food facilities from Cisco and U.S. Foods. Cash used in investing activities totaled $161.8 million for the first six months of fiscal 2017. These investments consisted of acquisitions totaling $82.1 million and capital expenditures of $79.9 million, or 1% of net sales, with the majority focused on capacity expansions to support our continued future growth. Turning to our fiscal 2017 outlook, we’ve confirmed our fiscal 2017 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. We also confirmed our second half fiscal 2017 adjusted EBITDA outlook to be in the mid to high teens range versus the second half of fiscal 2016, excluding the extra week, and we expect adjusted EBITDA growth to build sequentially from the third to fourth quarter of fiscal 2017. We believe the business is on track with our financial objectives this year. Our case growth is strong, gross profit continues to expand, and we remain confident in our ability to manage controllable corporate expenses as we progress through the second half of the year. Now I’d like to turn the call back over to George.

[George Holm:]

I’d like to provide you with a brief update of our strategic growth investments in customized and Vistar, touch on the topic of deflation, and then summarize our outlook for the remainder of the fiscal year. First, I would like to quickly highlight our new business with Red Lobster. As we head into the back half of fiscal 2017, the transitional costs associated with Red Lobster are behind us. Customized will benefit from delivering to all 678 domestic restaurants, and we expect them to show EBITDA growth in the back half of fiscal 2017 despite a challenging casual dining industry. Late in the fourth quarter of fiscal 2016, Vistar began servicing new geographies in the dollar store channel which required additional expense with another distribution center to service the customer. Productivity continues to improve as we progress through the second quarter. We anticipate the additional dollar store expense will continue to impact Vistar’s results for the next several quarters until the volume can be fully integrated into Vistar’s core distribution network. Although the additional expense will be with us for the next several quarters, we’re confident the dollar store channel in Metro New York will be profitable and afford us future opportunities for growth. The second investment for Vistar is the prototype distribution center outside of Memphis, Tennessee for handling our pick-and-pack volume more efficiently. The distribution center is now shipping product and we are on track to deliver cost savings to Vistar in the future. The additional costs of maintaining two distribution centers for our pick-and-pack volume is expected to be behind us as we head into the fourth quarter of fiscal 2017. Along with the start-up costs to bring the prototype distribution center online, these short-term transition costs are expected to normalize in the second half of the year and provide the platform for strong top and bottom line growth over the next several years. Deflation remains a key topic across the industry, so I’d like to take a quick moment to remind everyone that we have a strong track record of growing our cases, net sales and gross profit per case in both inflationary and deflationary environments. While inflation and deflation do affect our margin percentages, they have much less impact on our ability to generate gross profit dollars. I believe we have done a good job at managing the deflationary environment over the past year and a half as we have equipped the sales associates with electronic tools to understand the deflationary environment with a key emphasis on growing our gross profit per case. Finally to summarize, we believe we are on track to deliver our financial goals we laid out in August. We will continue to grow our independent business as a percent of our total cases and expand our performance brands. Our growth investments in Vistar, continued additions to the sales force in Performance Food Service, and integration of Red Lobster business into customized have us well positioned for growth in the coming quarter. Our M&A pipeline continues to be robust as we’ve made some small acquisitions in the specialty meat and seafood, which will complement our customer offerings and our growth strategy. I have confidence in our segment leadership and all of our associates who are working hard to exceed our customers’ expectations and meet our goals. Although there are certainly pockets of weakness across the industry and challenges to be met, I believe we have the right pieces in place to achieve our business and financial objectives. With that, Operator, Tom and I will now be happy to take questions.

[Operator:]

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

[John Heinbockel:]

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

[George Holm:]

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

[John Heinbockel:]

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

[George Holm:]

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

[Tom Ondrof:]

No, I think that’s true. You know, you’re out certainly looking and having lots of conversations, and I think all folks are doing that, it’s just a matter of the timing coming together. But certainly the activity behind the scenes is there.

[John Heinbockel:]

Okay, thank you.

[George Holm:]

Thanks John.

[Operator:]

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

[Edward Kelly:]

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

[George Holm:]

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

[Edward Kelly:]

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

[George Holm:]

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

[Edward Kelly:]

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

[George Holm:]

I think we have motivated sales force, we feel we give them good information as to what those key items are, and we leave it to them from there, Ed. It’s kind of their responsibility to penetrate the customers, and so far they’re doing a good job with that.

[Edward Kelly:]

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

[George Holm:]

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

[Tom Ondrof:]

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

[Edward Kelly:]

Great, thanks guys.

[George Holm:]

Thanks Ed.

[Operator:]

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

[Zack Fadem:]

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

[George Holm:]

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

[Zack Fadem:]

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

[George Holm:]

Okay, I’ll give you the things that we have coming up in that business that gives us confidence. One is in the month of January, we were profitable in Metro New York in that second facility, so that’s a big change from where were eight months ago. It just got better each month, and I give our people a lot of credit for getting that to where it is today, so it is still going to impact us but it isn’t what I would call the drain that it was before. Then with the two facilities that we have in Memphis, the equipment that we needed to do some retrofitting with will arrive on February 22. We’ll do some tests for about a week and then we should be in a position to go from two to one distribution centers. Tom and I are actually out there next week, we look forward to seeing it. But it’s operating and it’s operating well and it’s operating more productively than our automated ones are operating, so we have a lot of confidence there as well. As far as margins, we’re at a point now where we’re getting double-digit growth in our gross profit dollars, and we feel that we can get ourselves in a position where we don’t have double-digit growth in our expenses, and that’s something that we see happening in the fairly near future.

[Zack Fadem:]

Great, thanks for the color. Really appreciate your time, guys.

[George Holm:]

And I might also mention that--we did on the last call, but we had additional business that we started at the first of the calendar year, additional theater business. We have more that’s coming on in the month of February, so as strong as our sales have been in Vistar, we’ve actually got a little bit of increased momentum here and we continue to be real excited about what we can do from an ecommerce fulfilment standpoint.

[Zack Fadem:]

Great, thanks George.

[Operator:]

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

[Kelly Bania:]

Hi, good morning. Thanks for taking my questions. Just wanted to talk about case growth. I think your initial guidance for organic case growth was in the 4% to 7% range. The first half has been, I believe, just maybe a tad below 5%, so just curious how you’re thinking about the second half. You obviously made the comment about the uptick in independence into the first couple weeks of the third quarter, but has the chain business bounced back at all as well, or is that still kind of challenging?

[George Holm:]

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

[Kelly Bania:]

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

[Tom Ondrof:]

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

[Kelly Bania:]

Great. Then just one last one on Vistar. How much capacity will you have in the Metro New York area once this transition is fully complete?

[George Holm:]

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

[Kelly Bania:]

Great, thank you.

[Operator:]

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

[Vincent Sinisi:]

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

[George Holm:]

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

[Vincent Sinisi:]

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

[George Holm:]

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

[Vincent Sinisi:]

Okay, perfect. Thanks very much. Good luck.

[Operator:]

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

[Karen Short:]

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

[George Holm:]

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

[Karen Short:]

Okay, and then just looking actually at one of the tables, your reconciliation table, I was just wondering, adjustment to EBITDA and impact of acquisition-integration and reorganization changes, that dollar amount, that was generally related to the smaller acquisitions that you just spoke to this quarter, or is there anything else that would be in those numbers that would be material?

[Tom Ondrof:]

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

[Karen Short:]

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

[Tom Ondrof:]

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

[Karen Short:]

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

[George Holm:]

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

[Karen Short:]

Okay, that’s helpful. Thank you.

[George Holm:]

Thanks Karen.

[Operator:]

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

[Brian Hunt:]

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

[George Holm:]

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

[Brian Hunt:]

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

[George Holm:]

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

[Brian Hunt:]

I’ll perhaps give you a call offline and dive deeper into it, but thanks for your time.

[George Holm:]

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

[Brian Hunt:]

Thanks George.

[Operator:]

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

[Bill Kirk:]

Thank you for taking the question. Just one from me. It may be a little ways off, but how do you think about your customers’ ability to handle food inflation whenever it turns, on top of their already existing wage inflation?

[George Holm:]

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

[Bill Kirk:]

True. Okay, that’s useful, thank you.

[Operator:]

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

[Karru Martinson:]

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

[George Holm:]

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

[Karru Martinson:]

As you look at your product mix, are you seeing kind of the sustainability of the form to table kind of movement, organics, is that becoming more and more--you know, still at the same growth rates that it has in the past of your product mix?

[George Holm:]

We just don’t see it as that big an effect on our business. I mean, we do some of that type of product. We don’t see a lot of organic out there today. There’s certainly some and it’s grown, but it’s growing from such a small base that I just don’t think of it as something real impactful today in food away from home. Certainly more so in retail, but we want to do as good a job as we can do with it and have as big an offering as we can have, but it’s just not a big part of our business today.

[Karru Martinson:]

Thank you very much, guys. Appreciate it.

[Operator:]

Thank you. I’ll now return the call to management for any additional or closing remarks.

[Michael Neese:]

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

[Operator:]

Thank you for participating in the PFG Q2 Fiscal 2017 Earnings conference call. You may now disconnect.