Performance Food Group Co (PFGC) 2016 Q1 法說會逐字稿

Good morning and welcome to the Performance Food Group's first quarter FY16 earnings conference call. Today's call is scheduled to last about one hour, including remarks by PFG's management and the question and answer session. I would now like to turn the call over to Mr. Michael Neese, Vice President, Investor Relations, for PFG. Please go ahead.

Thank you, Jackie, and good morning everyone. We're here this morning with George Holm, Performance Food Group's CEO, and Bob Evans, PFG's CFO, to discuss our first quarter FY16 business results.

During our call today, unless otherwise stated, we are comparing the results to the same period in FY15. Earlier this morning, we issued a press release regarding our first-quarter results. For a detailed review of them, please see our earnings release on the investor relations section of our website at pfgc.com.

Our remarks in the earnings release contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking statements section in today's earnings release for various factors that could cause actual results to differ materially from 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 and in our presentation slides. Now I will turn the call over to George.

Thanks, Mike, and thank you everyone for joining us today.

Before I get into the first quarter details, I would like to share a short summary about our Company, Performance Food Group We're the number three player in the large, attractive, and growing food away from home industry. We partner with over 5000 suppliers and we sell over 150,000 products. I believe we have substantial scale and meaningful opportunities to continue our track record of share growth.

Our business model is centered on serving customers and our entire team is motivated to execute. Our simple strategy of growing our number of customers, driving our mix towards our most profitable channels and products, and improving productivity and profitability. The Company is focused on driving organic growth and will be opportunistic in accelerating that growth through accretive M&A activity. We firmly believe that our best growth opportunities lay in front of us, not behind us.

We have three segments to serve the food distribution universe, which we will discuss later in our prepared remarks. Performance Food Service and Vistar represent over 75% of our sales and the majority of our EBITDA and we've investing in growing most rapidly in these two segments.

Last year, we sold $15 billion and earned nearly $329 million of adjusted EBITDA. We did this from 68 distribution centers across the country so we have high asset turnover and attractive returns on capital. Most importantly, we have a great team focused on serving our customers and I want to thank all of our associates and let them know how proud I am of the job they are doing so well.

Now let's turn to our results. Performance Food Group's first quarter FY16 financial results reflect solid operating performance. Our case volume growth continued to exceed forecasted industry real growth, while we expanded our margins to grow adjusted EBITDA dollars faster than our sales growth.

Here are some highlights for the quarter. Case volume grew 5.1%. We achieved sales of $3.9 billion, an increase of 6.3%, gross profit grew 7.1% to $481.1 million, we grew our adjusted EBITDA and adjusted net income by 14.1% and 65.5% respectively, and we successfully completed an IPO in a very volatile market.

Let me focus on the business and segment performance in more detail. Organic case volume grew 4.9% during the quarter and 5.1% including acquisitions.

Case growth reflects new and expanding business with independent street customers in our food service segment, growth in Vistar sales in the theater, retail, and hospitality channels and a small acquisition of our Vistar segment. Our net sales increase of 6.3% was driven primarily by case growth, inflation for the first quarter increases at an estimated annual rate of 0.1% compared to an estimated annual rate of 3.2% during the prior-year period.

The rest of our net sales growth was accounted for by selling a different mix of products year-over-year and by a change in a customer contract that I will discuss in a moment.

As we enter our second quarter, we are witnessing food deflation especially in dairy, beef, poultry and seafood. That deflation has actually been accelerating during the first five weeks of our Q2.

Gross profit of $481.1 million was 7.1% better than the prior year and grew two full percentage points faster than our case growth rate. Operating expenses increased 4.9%, or slower than our case growth rate despite an increase investment in our sales force. Our Winning Together program, which is aimed at driving productivity in non customer-facing areas, recognized cost savings benefits of the quarter and we believe will yield savings throughout the fiscal year.

Let's turn to performance in our three segments. In our largest segment, Performance Food service net sales for the quarter were $2.4 billion, an increase of 5.2%, growth in cases sold was driven by securing new street and chain customers and further penetrating existing customers. Our definition of street customers is an independent account with less than five locations. The large majority have just one restaurant.

Street sales as a percentage of total sales were up 20 basis points to 44.9%. Performance Food Services strong case growth combined with both gross margin expansion from selling and improved mix of channels and products, and well-controlled operating expense drove EBITDA growth of 27% in the quarter.

Net sales for PFG Customized increased 6.7%, primarily as a result of an amended agreement with an existing customer which we lapped during the quarter. The increase was a result of changing a portion of the customized business from a distribution fee per case arrangement to buying product from the supplier and charging the customer both the cost of goods sold and the distribution fee.

Segment EBITDA decreased 3.9%, driven by lower case volume and expenses required to address driver shortages in some parts of the country. Turning to Vistar, net sales increased 9.8%, driven by case sales growth in the theater, retail, and hospitality channels, EBITDA decreased $1.6 million versus an especially strong prior-year quarter that benefited from inflation-based inventory gains.

Vistar's quarter also reflected investments in additional sales force capacity plus transaction and integration expenses related to an acquisition.

In summary, I believe our Company and business segments are poised for continued growth and market share gains. We remain confident in the ongoing growth potential of our business. I will now turn the call over to Bob Evans who will provide a more detailed snapshot of our financial results for the quarter and our outlook looking forward.

Thank you, George, and good morning everyone. I will briefly go through our financial results, discuss our IPO, cash flow, use of cash and wrap up with our FY16 outlook. As George highlighted, our first quarter saw both top line case growth and top line expansion. Case growth of 5.1% exceeded the industry real growth for 2015 forecasted by Technomic.

Our net sales growth of 6.3% was primarily driven by our case growth, and by the contract change in Customized, which did not affect case sales, but did add a little over $50 million to the sales line. Absent that change, sales growth would have been 4.7%.

Inflation was 0.1% and we sold a slightly less expensive mix of products in the quarter. Our gross profit dollars grew by 7.1%, or two full percentage points faster than our case growth.

Our operating expense dollars grew by 4.9% or just slower than our case growth. Above-average industry case growth accelerated by the gap between gross profit and operating expense growth rates drove adjusted EBITDA growth to 14.1% or $80 million for the quarter. Focusing for a moment on margin expansion, when we think of profit margins, we focus on how many gross profit dollars flow to the bottom line since 7/8 of our P&L is a pass through of cost of goods that we resale to our customers.

Adjusted EBITDA as a percentage of gross profit increased 103 basis points to 16.6% versus the prior-year which reflects selling a more profitable mix of channels and increasing the share of our sales mix in our proprietary performance brands.

Adjusted net income advanced approximately 65.5% to $18 million or $0.21 per diluted share compared to adjusted net income of $11 million or $0.13 per diluted share in the prior-year period.

Turning to our IPO, on October 6, 2015, PFG completed our initial public offering of approximately 16.7 million shares of common stock, at a price of the public of $19 per share prior to underwriting discounts and commissions. PFG sold approximately $12.8 million primary shares and certain selling stockholder sold approximately 3.9 million shares which included a fully exercised over allotment option.

The IPO generated aggregate net proceeds to the Company of approximately $223.7 million. Our primary use the proceeds was to pay off a portion of our second lien term loan.

We at the Company have a strong focus on cash flow. As we think about the business and its cash flow, we look at three primary uses for cash; working capital, capital expenditures, and acquisitions.

Focusing for a moment on working capital, like everyone else in the business, our working capital is dominated by inventory, accounts payable, and accounts receivable. Our accounts payable offsets our inventory investment, so the real key is accounts receivable which is driven both by case growth and by the rate of inflation.

In our first quarter, PFG experienced deflation at the end of the quarter which lowered our investment in accounts receivable relative to year end and generated substantial cash flow. In the first quarter of our fiscal year, we typically invest in working capital which affects both operating cash flow and net debt.

In the first quarter, PFG used $25.9 million in operating cash flows versus the prior-year use of $82.7 million which resulted in a year-over-year improvement of $56.8 million. The deflation at the end of the quarter was a large driver of this improvement, followed by the increase in our EBITDA.

PFG's net debt at the end of the first quarter stood at approximately $1.5 billion, a decline of $72 million versus a comparable prior-year period. Our investments in CapEx were moderate and have been at an annual rate of 0.6% in net sales in recent years, though quarter to quarter numbers will vary as we ramp up or complete projects.

In the first quarter, we invested $17.7 million in capital expenditures. Following the close of the quarter, in conjunction with our initial public offering, the Company repaid $223 million in borrowings under our term loan facility. As a result, the Company's pro forma net debt to adjusted EBITDA leverage, as defined in our lender agreement, is at 3.7 times.

Our post- IPO leverage coupled with over $0.5 billion in available liquidity from our asset-based lending facility, provides us with dry powder for acquisitions. Many of the companies in our industry are family businesses, so we have to approach acquisitions opportunistically.

Our acquisitions dollars have been focused on geographic expansion and capability acquisitions. We have been a disciplined and proven acquirer, having bought and successfully integrated 14 companies since 2008.

As we look ahead for the full year, I would like to provide our outlook for FY16. PFG expects adjusted EBITDA growth to be in the range of 9% to 12% versus a FY15 adjusted EBITDA of approximately $329 million. FY16 outlook for adjusted EBITDA includes the 53rd week, which will fall in the fourth quarter.

On a 52 to 52 week basis, the Company expects adjusted EBITDA growth to be in the range of 7% to 10%. This outlook is based on the following assumptions: organic case growth and a range of 3% to 5% which is a 52 to 52-week comparison. Interest expense in a range of approximately $72 million to $78 million which includes the 53rd week and reflects use of IPO proceeds to reduce PFG's long-term debt.

An effective tax rate of approximately 41%, and our annual weighted average, diluted shares outstanding of approximately 100,000,000 shares. PFG also expects capital expenditures for the full-year FY16 will be between $125 million and $150 million while depreciation and amortization will be between $115 million to $125 million.

Thank you for your time, and with that operator, George and I will now be happy to take questions.

(Operator Instructions)

Vincent [Sinisi] with Morgan Stanley.

Good morning guys, thanks very much for taking my question, and congratulations on a nice quarter out of the gate here. I wanted to ask first in regard to the case growth, very solid growth this quarter.

I know you had mentioned coming from new as well as existing customers, wondering if you could shed a little more light on either the types of street customers, or if there were kind of any differences geographically as well, maybe a little more color there?

We increased our net new accounts for independent, a little bit under 6% growth, and that has been pretty much where we've been the last several years. As far as geographically, pretty much widespread.

The growth that we are putting out doesn't vary much company to company. And we've talked about growing our cases for independents somewhere between 6% and 10% and we were right in the middle of that for the first quarter. So far in the second quarter we've seen a slight uptick in our independent growth and a slightly less growth in our national account as far as cases go.

That's helpful George, thank you. Maybe just a quick follow-up if I can, I know you mentioned that you are seeing acceleration in deflation specifically. Can you give us just what you're currently seen today in expectations for the rest of this quarter as well as the year?

Well, we started out with slight inflation at the beginning of last quarter, and by the last month of the quarter in September, we are experiencing some slight deflation. And then in the month of October, we've see in the rate of deflation, particularly in our independent business, go up about half a point a week and lately it has been running in the 3% to 4% range.

Is that something that you would expect to continue for this quarter and moderate in the back half of the year?

We would suspect so. We are pretty over index when it comes to cheese, that's a big part of our business. Last year we saw week to week deceleration in price last year in December particularly.

So we would expect it to moderate some but I don't see it going away. At least we don't see any signs that we are going to go back into inflationary period anytime soon.

Very helpful, thank you very much, good luck.

John Heinbockel with Guggenheim Securities.

So George, the 3% to 4% obviously includes ROMA and that obviously, makes sense. If you strip that out, are you still seeing a fair bit of deflation right now?

Yes we are. We track our product by 12 major product categories and we saw deflation in 6 of those 12 just last week. Biggest being dairy, so as that moderates, that will have an impact but like I said I still don't see us heading into an inflationary period anytime soon.

So then, two things. If you talk about pass through on deflation, the assumption or at least I think, that there is some directional benefit to margin, clearly not to dollars but to at least margin on the kind of deflation your talking about; and then the competitive environment, it would just strike me that at some point here some of your large competitors, obviously have to start showing better results, that we would have more rational pricing, right, then we've seen historically? I assume you're not seeing that yet but will we and when will be?

I'll start with kind of the first question and what impact deflation has. We have a very large percentage of our customers are on some type of contractual arrangement.

If that contractual arrangement is based on margin and there is deflation, our gross profit dollar per case tends to suffer. Where we have it on a fee, which is a large part of particularly our Customized business, what we see there, is no change in the amount of gross profit that we have come in but it actually helps our margin.

And then when you get to our street business, we've done a very good job of maintaining or increasing, depending on the product category, our gross profit dollars per case so we tend to have a little bit more flexibility there and we've done a really good job.

As far as the competitiveness of the marketplace, I think it's very competitive, it has been very competitive for a long time. We happen to have a group of our district sales managers from around the country in today and I was with them last night and they feel that it is a very competitive time right now. That said, we're seeing a slight uptick in our case growth in independent. So maybe we've got some rationality coming. I don't know, but it certainly is not affecting us today.

Okay and then lastly what does the M&A pipeline look like and is what's going on from sort of a top-level industry standpoint, particularly with all this deflation if it's going to last a while which it typically hasn't, is that creating more potential supply of acquisition candidates?

Well, John, we are always talking to people and we certainly are now. We don't have anything that we consider really imminent.

I think that deflation probably does not affect that. There's one thing you can count on with deflation in our business, it doesn't last very long. And also deflation tends to help companies with their cash flow, and when you get some of these independent owners, that's a very important number for them, so it actually can sometimes make things a little bit easier.

Okay, thank you.

Meredith Adler, with Barclays.

Thanks for taking my question. I guess I want to go back and talk a little bit more about competition and whether you seeing anything in particular areas, and maybe also talk about, does inflation or deflation impact Vistar at all? So I'll start with those two questions.

It's a very competitive industry and I think it has been for a long time. I don't know that it's much different now than it has been. Clearly everyone's focus is on independent growth which is understandable. It is a higher margin part of our business. But I really don't see big differences.

As far as inflation and deflation impacting Vistar, it had an impact on the quarter that we were just in because of last year. Prices in that industry tend to go up maybe once a year. Some companies don't even announce an increase every year. When one does, that typically ends up being a catalyst for several to do it.

Goes back to kind of the vending industry and if everyone is going to be out there changing the price on their machines they tend to want to do it all at one time; and we had fairly significant increases in prices in the quarter a year ago. When that happens, we tend to sense that coming, and we try to have additional inventory when that happens and we tend to get some good inventory gains when it does.

The other thing that also happens then is quite often we'll see some decline in volume because there is price sensitivity to that customer and that's part of the reason we had such great sales growth in Vistar for the quarter. But when we look at that business, although any time you have an earnings decline it is disappointing, we feel we had a very good quarter and that volumes were good. That tends to be a good sign for the future.

Theater is a big part of our business and we have some great movies that are going to be coming out, with Star Wars and another James Bond movie and another Hunger Games movie, those are kind of proven ones that they will do well. So we feel really good with that business, and when inflation comes and it typically comes all in one quarter and then you don't have to deal with it for a while.

That's helpful. One other question just about, if you think about underlying demand, I think some of the broad data is a little bit mixed in terms of traffic.

What are your customers saying about demand and are you also continuing to see or seeing any acceleration in the opening of new independent restaurants?

We can only speak to our customer base and that might not be reflective of the total market. We have a sense that the independent restaurateur is doing quite well.

Our business is good, we are seeing plenty of openings, there doesn't seem to be a shortage of available capital for people to open restaurants, so I think that has been good. We don't comment on any of the chain restaurants individually, we never will, But as a group, if you look at it broadly as a group that we sell, we are seeing some softness there. And the softness in the second quarter has been slightly accelerated from the softness in the first quarter.

Okay great, thank you very much.

Andrew Wolf, with BB&T Capital Markets.

Thank you, good morning. I just want to start with Vistar, if you take some of the adjustments like the acquisition costs and so forth, could you give us a sense of how the adjusted EBITDA would have been at the segment?

Andy, we're not going to break the adjustments out by segment, but if you kind of take out both the kind of the inflation-based inventory gains that we had last year as well as the small amount that we spent this year on the acquisition costs, Vistar would have been solidly profitable from a growth perspective in the quarter.

That's I was getting at. On the deflation happening, on a couple of your categories in particular, I just want to ask you what you think about the deflation in meat and what it could mean for restaurants? They have had a lot of menu price inflation in steaks and stuff.

Do you think they're going to be able to drop their menu prices and could that actually help their demand? Are they doing it? What is your sense on that?

First of all, the deflation that we are experiencing in meat right now is from a very high period a year ago. We see that the middle meats, your meats that you're going to cut steaks from, we think that is actually going to strengthen here, not necessarily the whole meat category but we see some strengthening in strips and revise and those types of items, tenders.

But I wouldn't expect to see any menu decline. I don't want to speak for our customers, I wouldn't project that.

I wanted to follow-up on the driver shortages you referenced I think with Customized, why isn't that impacting or could impact the other segments? Is it more like for longer hauls or are you seeing that maybe as an issue for the other segments?

We are seeing it across the board. What we've done with that is just added additional drivers.

We've also reduced a dependency on temporary drivers by making sure that we had an increase in full-time drivers. And markets where we felt that we were under the market we brought wages up to the market. And it hasn't really had a negative impact on us at this point primarily because we're kind of getting some things together to offset it and of course fuel has offset some of those costs.

Thank you, I appreciate it.

(Operator Instructions)

Zach Adams with Wells Fargo.

I want to ask a little bit about the Vistar business. Could you talk about the long-term industry growth rate?

Would you say the business has a similar growth trajectory as a broad line business or do you see more runway there? And if so, maybe you could walk through some of the drivers?

You know, the theater business pretty much grows at about the rate of the population, so that's going to be maybe a couple point grower. The vending business is dependent on employment for the most part, so as we see employment come back we should see that business get better.

When you get into the other channels I think it's difficult to get numbers. Our hospitality business, we are kind of creating demand as we get more of these mid scale hotels to put pantries in, and that has been a big driver of our growth.

The retail business, which is a very good business for us, is really dependent on retail sales and the traffic that those stores get. And traffic has not been great, but we have continued to get our products placed in more locations, so I guess to some degree we are creating the growth there. But we do feel it is a business that we can grow in that at least mid-single-digit growth area.

That's helpful, thanks. On your capital allocation strategy, over the long term, how do you think about priorities in terms of M&A, debt pay down, maybe buybacks over time.

In terms of M&A how would you prioritize opportunities across your business segments and geographies? Would you feel comfortable going back to a four to five times leverage ratio for the right opportunity?

This is Bob, the terms of capital allocation priorities, right now from both a CapEx and an M&A standpoint we tend to look both to Performance Food Service and Vistar more so than to Customized. We think the growth opportunities are a little better in those two segments.

In Performance Food Service this year, we're going to be adding modestly to our brick-and-mortar capacity. It's one of those things that is taking our CapEx up a little bit relative to what it had been over the prior few years on that. We just have some very good markets that we are doing well in like the southeast and out in Texas and up in the New England area where we feel that we can at capacity profitably for ourselves.

From an M& A standpoint, we are going to remain opportunistic about that because we could you just don't know when people are getting ready to sell, that's why we're talking to people constantly, as we are. I think that's also why we have a pretty high liquidity premium in the business. I think we always want to keep ourselves really liquid so certainly we are not looking forward to any share buyback program up until the time that our sponsors finish selling out at a minimum.

In terms of the overall leverage, for the right thing we would be happy to lever up. It would have to be a business that we think it's in our wheelhouse, that we think has a good management team, we tend to leave these things alone because we are a fairly decentralized organization and we think that is important. To be kind of nimble at the point of customer interaction, so we really need a good strong management team there.

Last but not least, we want it to be a business that we think has a lot of growth potential and we can bring some of our magic to them and get them to become even more profitable than they are.

Okay, thanks Bob, I really appreciate the color.

Ajay Jain with Pivotal Research.

Thanks for taking my question. I wanted to ask about the variability in your segment performance and how that is reflected in your guidance for the year.

Specifically for Customized and Vistar, do you expect the case volume trends from Q1 and EBITDA performance from the first quarter, do you expect those to continue or does your guidance assume some recovery? If you have any color on the segment, a specific outlook I would appreciate that.

Vistar will improve as far as comparisons for the previous year just because they don't have the big inventory gain numbers that they had last year in the first quarter. There is a little bit of it in Q2, but we are very confident that business will produce much better earnings growth as we get further into the year.

And Customized, we don't have any new business or new account imminent, so I think that business will be dependent on the success of our customers. We continue to do a good job of reducing expenses in that business but that business could be fairly flat from an EBITDA standpoint the rest of the year.

Customized is a really stable business for us, we do like the business and it's got a very nice return on capital so it plays an important part in the portfolio. It is just that it reflects the customer base right now, and the customer base is relatively flat from a growth standpoint.

But the earnings should be stable, it's a very well run business and it produces a good amount of cash.

That's helpful. If we assumed kind of flat volume growth for Customized, I just want to make sure I understand the change in revenue recognition for that specific customer you called out. If it was flat revenue growth, revenues would still be higher until you cycle that accounting change in Q1 of next year? Is that the right way to think about it?

No, we have cycled that accounting change and that was cycled in August. So when we report Q2 numbers, that will not be something we will have to talk about anymore.

Just before that, all that affected was the top line sales number. It did not affect cases and it did not materially affect EBITDA at all.

One final question, correct me if I'm wrong, I don't think you're hedged on fuel, but I was just curious if you could comment on how much the benefit from lower fuel prices was in Q1, if you could put a number on that at all?

Ajay, Fuel is one thing in the industry that can be unbundled from a pricing standpoint to customers. So while we did benefit from a gross fuel expense standpoint in the quarter and we're benefiting here in the second quarter so far, some of that we give back in terms of less fuel surcharges to our customers.

It's not as big a benefit as you may otherwise think. From a hedge standpoint, what we use are costless collars so we can provide ourselves in the protection on the upside and on the downside, if it goes low enough we actually have to pay off the collar.

Thank you very much.

Edward Kelly with Credit Suisse.

Good morning, and congratulations on a good quarter out-of-the-box. Just a few follow-ups, on the Vistar side in terms of the price increases, how consistent historically are the price increases in this business, and is there disability on when the next one may come?

There used to be, but there hasn't for the last several years. I think it is more around what their ingredient cost is versus how well they think they can push a price increase through at that time and I can't say that we have a great understanding for that.

We try as best we can to anticipate when those are going to happen. This would more normally be the time of year that it would happen. It typically happens November or December, so last year was different and sometimes we'll go a couple of years where they will be no increases, kind of at the machine level in the vending side of the business, which seems to drive the increases.

I guess at this point you think of when you give your outlook you don't really anticipate this and if it happens it happens, is that the way we should think about it?

That's correct. Even in our budgeting process, we never budget for that to happen because it is too unpredictable. But what is predictable is when it does happen, it will affect us positively on the EBITDA line, or a profit line and it will impact us negatively on the revenue line, but it goes away within a couple of months.

There has been a lot of talk about deflation accelerating in the 2nd quarter. How should we think about generally modeling it for Q2? If it's a down a few percentage points of negative inflation in food service, there are some offsets I guess in the other businesses, would you expect overall deflation for the company to be down 1%, 2% or more in Q2?

I would say that probably a good number. It would be more in our food service independent business, but overall because many of our chains lock in their pricing for periods of time to protect their menu price. We don't see any real deflation coming on the Vistar side of our business so I would think that 1% to 2% number is probably a good number.

Your gross profit per case has been strong, that even the last two quarters with the lack of any real inflation, as we progress into the second quarter we see a bit more deflation, how should we think about the cadence of gross profit growth per case now for Q2 and the rest of the year?

We think even in this deflationary environment that we will have better gross profit per case. And that's going to be driven by mix of business. That has what it has been for us for several years in a row.

The encouraging thing right now is that we are starting to see the benefits of our change in mix of business where before, our change in mix of business basically allowed us to have consistent gross margins when the industry margins were declining. We were going through some of the same competitive issues, we were just fortunate enough to have this change in mix that offset it.

So for us, if we can continue to change our mix of business, which we see ourselves doing, and actually can benefit from that in maybe a less competitive environment, that is a real positive for us going forward.

Your results this quarter were good, but pulled down I guess, by this temporary lull in where we are in the inflationary environment. Is there a way to think about what profit growth even in the quarter like this would look like in a more normalized 2% to 3% inflationary environment?

That is so difficult because the pricing dynamics in the market really tend to be focused around the gross profit per case you can get and that's even true on the short run street business which prices on a day-to-day, a week to week basis. It is really hard to be able to project what that would be. So what it have been better with a little inflation, we think so, but would it have been substantially worse if deflation have been even stronger in the quarter, it's kind of hard to say that either.

You use that number of 2% 3% inflation, and that's kind of the somewhat ideal number for us particularly in an environment where your costs are going up. If our costs are going up comparable to what inflation is going up, and if inflation is low enough to where it's not causing issues for our customers, that seems to be a good period of time.

Great, thanks guys.

(Operator Instructions)

Meredith Adler with Barclays.

I just have a quick follow-up, I don't know if you mentioned what your Performance brand penetration was in this quarter and whether you've seen anything that leads you to believe it will continue to increase?

We've always had that goal of growing our brands in independent a couple points more than we grow our independent cases. We don't so much of our brands outside of our independent customer base because our Performance Food Service, we're mostly a QSR business when you get outside of the independent. Fortunately we been closer to 4 [points] than 2 [points], and that has continued into Q2.

That has been another reason for increase in our gross profit dollars per case, we're just getting those benefits from the mix change. Meredith, right now that is accelerating for us, we are doing better. As to whether we can get that above the 4[%], I don't really know but if we can stay around 4% better than our case growth, that's a good number for us.

You are saying 4% higher than case growth?

That's correct.

Great, thank you.

(Operator Instructions)

I would now like to turn the call over to Michael Neese for any additional or closing remarks.

We would like to thank everyone for their participation on today's call, have a great day.

This concludes today's conference call, you may now disconnect.