Performance Food Group Co (PFGC) 2017 Q2 法說會逐字稿

Good morning, and welcome to the PFG Q2 FY17 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.

Thank you, Lori. Good morning, and thank you for joining us today. We are 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 FY17 results versus the same period in FY16. We issued a press release regarding our results this morning. You can find our earnings release on the Investor Relation's section of our website on PFGC.com.

Our remarks in the earnings release contain forward-looking and cautionary statements, and projections of future results. Please review the Forward-Looking Statements' section in today's earnings release and 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.

Thanks, Michael, and thanks for joining us today. I'm pleased to share PFG's second quarter FY17 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 grow our total cases by 5.6%, and we did that by taking market share. Gross profit improved by 6.2%. Our Performance Foodservice 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 FY17 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, the 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 customer's expectations. On that positive note, I would like to turn the call over to our CFO, 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 FY16. 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-year period to $0.29 per share.

Now let me take you briefly to the segment results. Performance Foodservice net sales for the second quarter increased 1.8%, driven by winning new independent customers and further penetrating 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 salesforce.

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 FY17, we began providing distribution solutions to a portion of Red Lobster's restaurants, and we are delighted to have completed the 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, theatre, vending and hospitality, as well as by recent acquisitions. EBITDA for Vistar was down $0.9 million to 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 FY17, including higher-than-expected medical claims, professional and 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 FY17.

Now let me turn to cash flow. During the first half of FY17, 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 rollout of new business in the Customized and Vistar segments.

Additionally, the prior year included a positive impact of the $25 million break-up fee received related to the terminated agreement to acquire 11 US Foods facilities from Sysco and US Foods. Cash used in investing activities totaled $161.8 million for the first six months of FY17. 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 FY17 outlook, we confirmed our FY17 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 FY17 adjusted EBITDA outlook to be in the mid- to high-teens range versus the second half of FY16, excluding the extra week. And we expect adjusted EBITDA growth to build sequentially from the third to fourth quarter of FY17.

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 would like to turn the call back over to George.

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 FY17, 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 FY17, despite a challenging casual dining industry.

Late in the fourth quarter of FY16, 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 are 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 cost 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 FY17. Along with the start-up cost 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 would 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 in 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.

And 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 salesforce in Performance Foodservice, and integration of Red Lobster business into Customized have us well positioned for growth in the coming quarters. Our M&A pipeline continues to be robust, as we have 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 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 Instructions)

John Heinbockel, Guggenheim Securities.

So, George, if I look back historically, before this year, there was a history of the Foodservice EBITDA growing 12% to 20%, or something like that -- the last two quarters, 5%. And looks like to get back to where you want to be in the second half, that we are 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 salesforce, or some other factors?

Certainly the investment in the salesforce 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 workforce to almost entirely full-time employees, with little dependence on temps. So that affected us.

But we feel good about our Foodservice business. We feel good about it getting back to double-digit EBITDA growth, and we are pleased with how we have started this quarter, with our growth in the independent sales.

And then, if you look at -- you talked about the M&A pipeline, generally. Again, you've had a, prior to the whole Sysco-US Foods thing, a very strong track record of doing of lot of M&A every year. It's been a little light the last probably year plus, maybe lighter than you would like. Is that still -- are the assets not there, or are they not there at the right price?

Price is always a key. I would say that getting these negotiated and getting them finished are not an easy process in today's environment. We did get a couple done in the Foodservice 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. And, Tom, you might want to comment beyond that.

No, I think that's true. And you are out certainly looking and having lots of conversations, and I think all the folks are doing that. It's just a matter of the timing coming together. Certainly the activity behind the scene is there.

Okay, thank you.

Thanks, John.

Edward Kelly, Credit Suisse.

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 are seeing so far in Q3 and what we should be expecting? We did hear from Sysco, yesterday, talk about tough comparisons, and 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?

What we saw last quarter -- we did see softness with our customers. It wasn't consistent though. 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. And then, as we've gotten into this quarter, I think the calendar has 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. We actually had double-digit independent growth in the month of March last year. So there's potential for tough comparisons if we run into weather issues. But at this point, we are probably -- I would say we're not that concerned, particularly since we have seen an uptick, from an independent standpoint, over the last five-week period.

Okay. And then as we think about independent case growth, 6% this quarter, and 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 onboarding new customers because of industry growth?

What we have seen in the last quarter is just very slight a decline in our new business that we bring in, but it's very slight. We have actually -- with lost business, we've gotten better. The penetration -- we are 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 are selling them that SKU this year -- we're not seeing the growth. So that, to me, just reflects a little bit of softness in the industry.

But 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?

I think we have a motivated salesforce. We feel we give them good information as to what those key items are, and we leave it to them from there. It's their responsibility to penetrate the customers. And so far, they are doing a good job with that.

Okay. And just last question for you, on the outlook. We are obviously into the second half now. I think last quarter, and as we think about 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 are another quarter into the year and the key variables that are really needed to hit your back-half goals?

I will make a couple comments, and then turn it over and let Tom make some comments, too. What gives us confidence is, we sit and make projections. We spend a lot of time with our people, and we [vet] 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. And with that, I'll have Tom make a couple comments as well.

I think we, again, as George said, spent 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 and the casual dining environment. But a lot of this is within our control, and so we have that confidence in that visibility.

Great. Thanks, guys.

Thanks, Ed.

Zack Fadem, Wells Fargo.

Hey, good morning. 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 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?

Well, ironically, that obviously Customized is the business we have that is 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 have passed. As far as who is bidding on it, I don't have a great feel for that. I know there has been some RFPs done, where there hasn't been anybody come back, other than the incumbent. So that's a little different for us to see.

But 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 are at. Our service levels in our Customized have just been unbelievable of late, with better than I actually thought a 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, I think it's competitive in the street, independent -- which it is always is. It's always very competitive. And I think when it comes to the chain business, that there's -- 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.

Okay, that's helpful. And 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 the impact of the pick-and-pack facility coming on, and than 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?

Okay, yes, I will give you the things that we have coming up in that business that give 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 we 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. It is still going to impact us, but it isn't what I would call the drain that it was before.

And 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 will 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 margin, 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.

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

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 have actually got a little bit of increased momentum here. And we continue to be real excited about what we can do from an e-commerce fulfillment standpoint.

Great. Thanks, George.

Kelly Bania, BMO Capital.

Hi, good morning. Thanks for taking my questions. Just wanted to talk about case growth. I think your initial guidance, organic case growth was in the 4% to 7% range. The first half has been, I believe, just maybe a tad below 5%. So I was just curious how you're thinking about the second half. You obviously made the comments 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?

Well, we are 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. We've seen slowness in our chain business within Performance Foodservice, too, not just with Customized. I mean, there are customers out there that are doing really well, but all in all, it's been slow. So that's not something that we are necessarily counting on to get the 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.

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

That's a big part of it, Kelly, the expenses. But 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 onboarded in the second quarter, that is sort of clean, so to speak, in the second half of the year.

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

I would say that's one of the reasons that we have been slow to get a new facility -- we want to make to 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 cooler and freezer space. But we are 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's no longer a drain on the business for us.

Great. Thank you.

Vincent Sinisi, Morgan Stanley.

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

I doubt that we will have that done within the next couple of 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 are 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 the trend towards offering a higher level of consumable product.

Okay, that's helpful, George. And just a fast follow-up 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 of months, there seemed like four. And then going forward, what are you looking for in terms of specific either geographies or product areas? That would be great.

The two that we had in January, one was a Foodservice seafood distribution business, and the other one was a broadline distributor. We really haven't changed what we are looking at, as far as acquisitions goes. Obviously if we have an opportunity to buy a broadliner that fits with us, that would be just great.

We want 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 are 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.

Okay, perfect. Thanks very much. Good luck.

Thanks.

Karen Short, Barclays.

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?

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. The 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 is just some weather changes that could affect us, or maybe more activity in export. That's about the only things I see that could really have much of an impact.

Okay. And then just looking [ex-year] actually, at one of the tables -- your reconciliation tables. I was just wondering, adjustment to EBITDA and impact of acquisition integration, and your organization 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?

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

Okay. And then, bigger picture -- obviously your free cash flow generation continues to build. And wondering if you could 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.

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

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

No, not really. We are 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 the same pressures as we are, as far as the industry being soft, so that probably makes it a little bit harder. But we are making constant progress, and I think we will continue to. There is nothing that shows us that we won't.

Okay, that's helpful. Thank you.

Thanks, Karen.

Bryan Hunt, Wells Fargo.

Thanks for your time. I was wondering if you could 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?

We always state that we want to throw our brands in that 1% to 4% faster than we are 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. But want to reiterate again that, so far this quarter, it looks like we are back on track there.

And we can continue, we think, to do that. And even you look at the sequential decline in our independent case growth, we've been there before, too, over this 30 quarters that we have 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 are confident in our brands that we will be able to continue with that 1% to 4% growth, exceeding our independent case growth.

And then 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?

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 fulfillment of e-commerce-type orders. That's what 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 to this group that 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. And this just gives us an opportunity to be more efficient at that, and also to handle the much wider SKU base than we are handling today.

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

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 will give you more color there.

Thanks, George.

Bill Kirk, RBC Capital Markets.

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

That's a good question. 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 are willing to pay that price. And 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. And they all offer a different price-value relationship, too, so it's easier for some than others.

Sure. Okay, that's useful. Thank you.

Karru Martinson, Jefferies.

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

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 products 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.

And as you look at your product mix, are you seeing the sustainability of the farm-to-table movement? Organics, is that becoming more and more -- still have the same growth rates, as it has in the past, of your product mix?

No, we just don't see it as that big an effect on our business. We do some of that type of product. We don't see a lot of organic out there today. Certainly some, and it's growing, 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. 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.

Thank you very much guys, appreciate it.

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

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

Thank you for participating in the PFG Q2 FY17 earnings conference call. You may now disconnect.