Performance Food Group Co (PFGC) 2019 Q2 法說會逐字稿

Good day, and welcome to the PFG Fiscal Year 2019 Q2 Earnings Conference Call. Today's call is scheduled to last about 1 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, Laurie, and good morning, everyone.

We're here today with George Holm, Performance Food Group's CEO; and Jim Hope, PFG's CFO.

We issued a press release regarding our 2019 fiscal second quarter results this morning. The results discussed in this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found at the back of the earnings release. You can find our earnings release in the Investor Relations section of our website at pfgc.com.

Our remarks in the earnings release contain forward-looking statements and projections of future results. Please review the cautionary forward-looking statement Section in today's earnings release and our SEC filings for various factors that could cause our actual results to differ materially from our forward-looking statements and projections.

Now I'd like to turn the call over to George.

Thanks, Michael. Good morning, everyone, and thanks for joining our call today. I'm pleased to report our second quarter results exceeded our expectations. Our results were driven by Vistar's strong top line growth. Vistar is having an outstanding year and grew its EBITDA by over 30% in the quarter through increases in existing channels such as theater, retail and vending, and strong results in new channels such as corrections.

In the Foodservice segment, we are pleased with the sequential improvement from our first quarter of fiscal 2019, and our strategic investments continue to be on track to support our long-term growth objectives. We experienced slight same-store sales improvement in our casual dining customers. With these operational and financial results, we remain on track to achieve our full year guidance, representing another year of strong growth across our company.

Now let's turn our attention to our 2 segments. Our team's continued execution in our Foodservice segment enabled us to generate strong total case growth of 5.5%, which is slightly above our stated case range of 3% to 5% this fiscal year. The increase was driven by 4.3% increase in independent cases, chain case growth and continued growth in our performance brand cases, and broad-based growth across all of Vistar's sales channels. The increase in total sales volume was also partially attributable to slight same-store sales growth in the company's casual dining segment.

We continue to make investments in technology and our digital ordering platform. Approximately 1 out of every 5 independent orders are placed on our technology platform today. We are also making investments in our customer-facing tools, including continued enhancements to our MarketWatch platform. Vistar delivered another quarter of strong top and bottom line results. Net sales increased 12%, and as I mentioned, EBITDA grew by more than 30%.

The top line increase was driven by broad-based case growth across all our channels, most notably in our theater, retail, vending channels led by micro kitchen and micro markets. As you may recall, Vistar has now lapped our CCSI expenses from an acquisition last year, and we expect continued tailwinds throughout the fiscal year.

I believe our Foodservice segment is making good progress. We still face some headwinds, specifically related to where we made investments in people.

We continue to see higher labor costs where we did make these investments, but we're moving in the right direction. The investments are paying dividends, and we feel we are headed in the right direction. Craig Hoskins, Jim Hope and the team are focused on leveraging our operating expenses.

Before I discuss one of our associates, I would like to briefly discuss our macro-industry backdrop. We believe food-away-from-home continues to grow. We believe the U.S. consumer is doing well. Consumers are prioritizing their spending, some saving and paying off debt, some spending on technology and life experiences while others continue to want to experience a great meal outside of their homes. Overall, independents are doing well, and we feel we are gaining share.

We are seeing several chains and casual dinings post same-store sales growth most likely driven by their promotional activities. In summary, we're on track to deliver another year of strong growth. We plan to deliver against our strategic priorities and return value to our shareholders. Vistar is exceeding our expectations, and they are executing their growth plans. The Foodservice segment is making good progress, and their strategic investments are on schedule and will pay off later this year. We expect to continue to see sequential improvement in that part of our business.

This quarter, we'd like to highlight an associate who fully embodies PFG's dedication to service. [Charlie Lee] is with PFG's Performance Foodservice Carroll location in Louisiana. He joined the company as a driver in 1969 and has been providing exceptional service to PFG customers ever since. During Charlie's 50-year career, he has served as a role model and mentor for not just our drivers but all our associates through his reliability, ambitious attitude and thoughtfulness. His customers have always been his top priority. One restaurant manager said he is very respectful, professional, patient and always takes time to help us whenever we're busy.

I want to thank Charlie who is also a Vietnam War era veteran for his service to our country and his steadfast dedication to this company for half a century. Charlie, despite being in his 70s, continues to deliver, as a driver, 5 days a week and volunteers to work a half-day on Saturday as a helper.

I will now turn the call over to Jim, who will discuss our second quarter results in more detail.

Thank you, George. Good morning, everyone. I'm pleased with our second quarter results. Total case volume increased 5.5% with underlying organic growth of 3.6%. Total case volume included planned, chained sales growth, a 4.3% increase in independent cases, growth in performance brands cases and broad-based growth across Vistar's sales channels. The increase in total case volume was also partially attributable to slight same-store sales growth in the company's casual dining customers.

Net sales grew 7.1% to $4.6 billion. The increase in net sales was primarily attributable to growth in Vistar, most notably in the theater, retail and vending channels, and case growth in Foodservice, specifically in the independent restaurant channel. The increase in net sales also reflects an increase in selling price per case as a result of inflation and mix.

Overall food cost inflation was approximately 1.2% in our second quarter. We experienced inflation in frozen foods, meats, produce and seafood. And some categories were deflationary such as cheese, poultry and eggs.

Given what we are seeing today, we expect inflation to increase approximately 1% to 2% this calendar year.

Gross profit for the second quarter grew 8.3% to $614.6 million. The strong gross profit increase was led by case growth and from selling an improved mix of customer channels and products, typically in Vistar's channels and the independent restaurant channel. Gross profit margin as a percentage of net sales was up 10 basis points over the prior year period to 13.3%.

Operating expenses rose 4.5% to $541.6 million. The increase in operating expenses was primarily due to the increase in case volume and the resulting impact on variable, operational and selling expenses as well as the continuing expense associated with the second half of fiscal 2018 investments in sales, warehouse and delivery personnel within the Foodservice segment.

Our OpEx control was improving sequentially from our fiscal fourth quarter of 2018, but we have more work to do in this area.

Net income for the second quarter of fiscal 2019 declined 44.7% year-over-year to $43.1 million. The decline was primarily a result of a $57.1 million increase in income tax expense, partially offset by the $23.9 million increase in operating profit. The increase in income tax expense was primarily a result of the prior year impact of the Tax Cuts and Jobs Act and the prior year excess tax benefit associated with the performance vesting of certain stock-based compensation awards. The effective tax rate in the second quarter of fiscal 2019 was approximately 23.4%, and we expect our full year effective tax rate for fiscal 2019 to be approximately 26%.

EBITDA increased 34.2% to $109.4 million in the second quarter. Adjusted EBITDA rose 11.3% to $116.9 million compared to the prior year period. This increase was higher than our expectations, driven by Vistar's results, improved sequential performance in our Foodservice segment and same-store sales growth in casual dining. Diluted EPS declined 45.3% to $0.41 per share in the second quarter, due primarily to the increase in income tax expense. Adjusted diluted EPS increased 15% to $0.46 per share in the second quarter over the prior year period.

Turning to cash flow. In the first 6 months of fiscal 2019, PFG generated $70 million in cash flow from operating activities, an increase of $37.4 million versus the prior year period. The improvement in cash flow from operating activities was largely driven by lower income taxes paid and improvements in working capital.

For the first 6 months of fiscal 2019, PFG invested $60.1 million in capital expenditures, an increase of $21.6 million versus the prior year period. We expect our fiscal 2019 CapEx spending to be approximately $150 million to $170 million.

In the first 6 months of fiscal 2019, PFG delivered free cash flow of $9.9 million, an increase of approximately $15.8 million versus the prior year period. We are focused on our working capital initiatives and increasing our free cash flow for the remainder of the year.

As we announced in November, the board authorized a share repurchase program for up to $250 million of the company's outstanding common stock. During the 3 months ended December 29, 2018, we repurchased 157,900 shares of common stock for a total of $5.2 million or an average cost of $32.76. As of December 29, 2018, approximately $244.8 million remained available for additional share repurchases.

Now let me take you briefly through our segment results. Second quarter net sales for Foodservice increased 5.8% to $3.7 billion compared to the prior year period.

Net sales growth was driven by an increase in cases sold, including independent case growth of 4.3% and solid independent customer demand for Performance Brands. This increase in net sales was also attributable to an increase in selling price per case as a result of inflation.

For the second quarter of fiscal 2019, independent sales as a percentage of total segment sales was 32.5%.

Second quarter EBITDA for Foodservice increased 2.2% to $104.3 million compared to the prior year period. Gross profit increased 5.3% in the second quarter of fiscal 2019 compared to the prior year period as a result of an increase in cases sold as well as an increase in gross profit per case. The increase in gross profit per case was driven by a favorable shift in the mix of cases sold, including more Performance Brands' products sold to our independent customers. The second quarter EBITDA was impacted by higher operating expenses, driven largely by the prior year's strategic investments in sales, warehouse and delivery associates and higher fuel prices.

Vistar continued to have another robust quarter. For the second quarter of fiscal 2019, net sales for Vistar increased 12.3% to $941.9 million compared to the prior year period. This increase was driven by strong case sales growth in the segments, theater, retail and vending channels. Second quarter EBITDA for Vistar increased 33.5% to $45.4 million versus the prior year period.

Gross profit dollar growth of 19.4% for the second quarter of fiscal 2019 compared to the prior year period was fueled by an increase in the number of cases sold.

Operating expense dollar growth of 13.8% for the second quarter of fiscal 2019 was primarily the result of higher variable operating costs associated with the higher case volume. The CCSI integration continued to show good improvements, and we're realizing solid synergies from the transaction.

Turning to our outlook for fiscal 2019, we reaffirmed our full year adjusted EBITDA growth to be in a range of 7% to 10%. We continue to expect that the 7% to 10% adjusted EBITDA growth will reflect second half adjusted EBITDA growth in the high single to low double-digit range. We also reaffirmed our fiscal 2019 adjusted diluted EPS to grow in a range of 10% to 16%.

In summary, our first 6-month results are on track. We are seeing strong top line growth in our business. The investments we made in Vistar nearly 18 months ago are paying off. And we're beginning to see sequential improvement in our Foodservice segment. Free cash flow continues to improve, and we are continuing to focus on working capital.

And with that, I'm going to turn the call back to George.

Thanks, Jim. In summary, our associates are determined to provide the best customer experience, and we believe we have the right strategies and made the right investments to deliver best-in-class service and sustainable annual growth.

And with that, we're here to take your questions.

(Operator Instructions) Our first question comes from the line of Edward Kelly of Wells Fargo.

George, could we start with independent case growth? Can you just provide some color on what you saw there during the quarter? Obviously, there was a little bit of a sequential deceleration. I think the thought from you guys has been that we should see some acceleration throughout the year. Based upon the investments that you're making, is that still in the cards? And just thoughts around what you're seeing there in the outlook?

Yes, we believe that we will improve as the year moves along. We have people coming off noncompetes, we feel like we've made some pretty good investments in people. We had an exceptional January as far as independent growth goes. Now we also feel that we probably had, I guess, more difficult weather last year than we had this year. So we're, at this point, trying not to get too excited about the first 6 weeks. But so far so good. And we feel like -- sometime between now and the end of this fiscal year, we're hopeful to get back in that 6% to 10% range that we've been doing for about a decade.

All right. And I guess just a follow-up is related to guidance then. And you maintained your full year guidance. You're tracking ahead of it to date. You're expecting a strong back half. Is there any reason that you're keeping the low-end in play here? Is it just simply conservatism, weather volatility? Just trying to understand the thought process around that, around guidance?

Yes, thanks, Ed. It's Jim. Look, I believe our Foodservice segment is making good progress, we're encouraged. They still face some headwinds, specifically related to higher labor, but they're moving in the right direction. Craig Hoskins and his team are focused on what matters, including leveraging operating expenses. Weather could always impact us in our fiscal third quarter. But we're watchful, and we're realistic when it comes to weather and Q3 results. We've started Q3 back in our independent case range, as George mentioned. However, we do believe there was an easy comp due to weather in January 2018, and we all know March makes the quarter. So we have to get through March.

George, could I just sneak in one more on Vistar for you? I know this has been a business that has just put up stellar performance. As you take a step back, can you just talk about what the longer-term opportunity is for this business? What your vision is? How much of it do you get there organically? And how much is -- how important is M&A going to be here?

Well, we typically have had a higher percentage of our both sales and EBITDA growth come from M&A in Vistar than we have in Foodservice, and we actually see that continuing for a period of time. It's hard to say how long, but I think we're probably in a good shape for at least another year. The business is extremely well managed. We've been at it for a long time. I think the business has matured, and certainly, we have high shares in the channels that we're in. But we also see other channels that we can continue to provide good service in. And if it's kind of heavy single serve in a channel, if it's heavy with candy, snacks, particularly specialty beverage, I guess, beverage in general, but particularly specialty beverage, we feel we belong in those channels. So I think that's where our growth is going to come. And it's just a very well-managed business. And as I said we've done it for a long time, and we think we're pretty ingrained.

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

So actually I just wanted to look at each segment. As you said, obviously, Vistar's performance has been outstanding. But I guess, what I'm wondering is, as we look forward, how should we think about EBITDA growth ranges kind for each segment in the second half, but I guess, as well, just on a longer-term algorithm?

Yes, Karen, we haven't provided guidance, and don't provide guidance on the segments going forward. I think we'll stick to our 7% to 10% range. Appreciate the question, but we'll stick to our 7% to 10% range that we've provided.

Yes, I guess I just -- I mean, thinking about going forward, I mean, obviously, we want -- we all scrutinize performance of each segment. So it would just be helpful, if even directionally, you could kind of give some commentary?

Yes, I'll do that. Once again, I would state that I think we've got some tailwinds in Vistar for a while to come. I also feel that the sequential improvement we're getting in food service that we're going to continue to get. Running 30% EBITDA growth for a long-term period of time is not something we're suggesting would happen in Vistar. But as we see the continued improvement in Foodservice, that has a more significant impact on the total company just because of the sheer size of our Foodservice. So I think that what Jim stated is very accurate that we're real comfortable in that 7% to 10% range. We have been in that range for a long time. Now we're not always going to do it in the same way, and we'd love to see Vistar continue that kind of EBITDA growth, but we're not so sure that, that's the kind of thing you plan for.

Okay. And then I just wanted to ask a little bit about Craig's position. Just as of last call, the last call you didn't seem to feel you needed to put anyone in the role of President and CEO. So I just was wondering what changed there.

No, we've always thought like we were going to put somebody into that position. We just wanted to make sure that we looked at all potential candidates that are internal and external. And in the end, we made the great choice of putting Craig into that position. I think it's going to add a great deal for us because of his background. He's had a very senior role in Vistar, he had a very senior role in Roma and a very senior role in, well, he actually was the CEO of Customized for 7 years. So he has seen the whole company. And I've always been a believer that there's more that we can do as a group than we have done in the past. And he and Pat Hagerty, that runs Vistar, have worked together for many, many years. They were both at Multifoods Distribution Group when I did the original acquisition, which actually goes back to 2002. So we've got 2 really experienced people running our 2 largest businesses, and I think we're just in great shape for the future.

Okay. And then, sorry, last question just on Vistar. In terms of maybe branching into some other, I guess, verticals, is that something we should still expect, maybe more driven by M&A, or would that be organic in nature?

We have always entered a new channel through some type of M&A and have not really done it just greenfield. And historically, we've had about 50% of our increase in both sales and EBITDA have come from M&A. And we see that continuing, really, for the foreseeable future. And that's 50% of our increase in sales and EBITDA, I'm sorry.

Your next question comes from the line of Christopher Mandeville of Jefferies.

George, on your comment about January being exceptional, if I looked at that on a 2-year basis, would you have actually seen a sequential improvement off of the near 11% growth rate that you showed in Q2? Just trying to get a sense of the actual magnitude of improvement.

Yes. We do have good sequential improvement. I think you're kind of asking like about a 2-year stack improvement?

Correct.

We're -- we had a good January.

Okay. And you're still committed to trying to get yourself to a 6% independent number by the end of the year?

Always committed to that. And the one thing that we're being cautious with is that March typically exceeds 50% of our EBITDA for the Q3. And we're -- I think we're in a better shape to comment on the year once we get through the month of March and see how that goes.

Okay, that makes sense. Very prudent. And then maybe just to kind of follow-up on Karen's question to get a sense of segment EBITDA growth. Can you help me square some of your comments on being ahead of schedule on Vistar? But then maybe Jim having mentioned that you guys are kind of tracking in line with your plan for the first half. Just trying to figure out what's going on between the segments here. You also referenced that you're seeing some sequential improvement in PFS, but then maybe also not to expect continued 30% growth on Vistar.

Yes. I'll break it into 2 pieces. Vistar is doing exceptionally well, and we don't typically expect a company to deliver those kind of results year-over-year. I mean, it's impressive, and we're still pleased and encouraged with the work and the results they're delivering. Performance Foodservice, our Foodservice division, is starting to show signs of delivering slightly better results. I made remarks about the specifics there, and it's early, and we're encouraged there by what they're starting to do.

Okay. And then just a final housekeeping question. What was the private brand mix and online mix for independents in the quarter?

Chris, I'll follow up and get that back to you after the call, if that works.

Your next question comes from the line of Greg Badishkanian of Citi.

It's actually Fred Wightman on for Greg. I think you'd mentioned a slight -- some slight same-store sales growth in casual during the quarter. It sounds like at least a portion of that was due to promotional activity. How does that category feel to you today? And historically, what has that elevated level of promo activity meant for case growth in the category?

Yes, this is George. I mean, we certainly saw improvement. There was lot of promotional activity, and it was heavy. And I think we have a tough time commenting on that. First of all, obviously, we're not going to comment on any individual customers. But it was a quarter where in aggregate, we saw case growth at the same-store level, which we have not seen for a long time. But there were winners and losers, and some did better than others. I would say, all in all, we're encouraged, but we just don't know the level that was weather and the level that was just promotional activity.

Okay, that makes sense. And as far as inflation, it seems like you're expecting similar levels of inflation or maybe a slight uptick going forward. Could you sort of talk about the cadence of inflation you saw in the quarter? And then if that has accelerated or changed in any way into January?

No, we haven't seen much change. It was steady inflation. And slightly over 1% is a pretty low degree of inflation in our business.

Your next question comes from the line of John Heinbockel of Guggenheim Securities.

So George, what's the -- where do you stand now with thinking about onboarding new salespeople? The right run rate, I think, you've talked about is probably in the 2% to 4% range and the quality of the people you're seeing now as other distributors struggle, right, with cost. And maybe, I don't know if you're seeing a higher-quality candidate pool. But where do you sit with that? And what do you think the right steady state that growth rate is?

I would say, we would like to be more than that 2%, the higher end, probably 4%, is good for us. We find that if we're bringing too many on, it just kind of stresses our ability to train people. As far as the quality of them, I would like to think that we're getting better at picking people. We find that our turnover is early, typically pretty quick. And if we keep them for much over a year, they tend to stay long term. I think it's tough for us to comment on the quality of people. We have been able to continually reduce our turnover rate. So I don't know if that points more towards just the selection process or what we're seeing in people.

And the -- when you think about where industry demand sits and then that 6% to 10% target, including the low-end would seem to be attainable. But do you think the high end of that range in light of where demand is, is that something that's really off the table if you're growing 3% or 4% sales percent growth?

Yes, John. I think we need some help from the industry if we're going to get more towards the high-end of that range. And what we continue to see today is that within our, what we call, existing business where we've sold the account last year, we've sold the account this year, we continue to see that we are growing our line items faster than we're growing our cases, which is probably not the most sophisticated way to look at same-store sales growth. But what we do see is that the products that we've sold to them both years, they tend to be using a little bit less of it than they did a year ago. So we need some help at kind of that same-store growth to get to a higher part of that range.

Okay. And then maybe lastly for Jim. So on the working capital front, where is the biggest opportunity, right? And maybe in sizing that, is it a $100 million opportunity in total, is it more? What's the magnitude do you think?

Yes, John. I believe we have reasonable opportunity in multiple areas and working capital, and we're going to attack it from several different angles. I don't really want to put a level of magnitude on it right now on the call. Certainly, appreciate your question, but we believe it's an area that we can continue to work on. I don't see it as dramatic, but I see it as helpful.

Your next question comes from the line of Judah Frommer of Crédit Suisse.

Maybe just go -- to go back to the EBITDA growth for a second. It sounds like you had anticipated sequential improvement throughout the year and kind of total company EBITDA growth by the outperformance at Vistar this quarter maybe changed that a little bit. Is there anything within Vistar that happened in Q2 that we can view as onetime or a particular benefit for this quarter in any of the subcategories you called out?

Well, a year ago -- this is George. A year ago, we -- a little over a year ago, as we started to get the projection of what the numbers were going to be like in theater, it became quite evident that with the acquisition that we had made where we were continuing to provide service from the acquisition that we were going to have some capacity issues. So we moved that business earlier than we had planned to move it so that we were prepared for Star Wars in December. So we had some expense last year where we were training, in Q2, these employees to get them ready in the Vistar facilities while we were continuing to pay the same for that business done out of the acquisition buildings. And then we had some severance to deal with. So I would state, and these are very hard to figure, but I would say that we probably had a decent amount of expense last year that was nonrecurring expense. So as we get to now, we only have one of those facilities left from that acquisition. So we're operating out of less buildings, and we're operating without having an excessive amount of people in training. So yes, we definitely had easier comparisons in the second quarter of last year in Vistar than we typically would. We don't have the ability to quantify that because you are moving so much business around.

Okay, that's helpful. And then maybe jumping over to your first share repo, maybe ever. How should we think about kind of share repurchase versus M&A? You sound a little bit more positive on M&A opportunities within Vistar. Obviously, you guys have talked about an expensive deal that may close any quarter now. But on the Foodservice side, how are things looking over there?

Yes, I'll comment on that and then I'll turn it over to Jim for the share repurchase program. We've always been very opportunistic with acquisitions, and we've always been aggressively trying to find the right acquisitions. But we're also always concerned about the multiple that we pay for them. And we are as concerned today as we have ever been.

We do see some opportunities in Vistar. In Performance Foodservice, we certainly have several conversations that are going on. I would say that today, there is a higher level of confidence around our ability to close an acquisition or 2 in the Vistar world than there is in our Performance Foodservice world.

Yes, and talking about capital deployment in a way and your share repurchase program question, the way we think about how we deploy capital is, well, we'll invest in the business. We'll look at capital expenditures for expansions in the PFS division in Vistar, our Foodservice division in Vistar, M&A and then the share repurchase program certainly comes at the end of that. We'll also be working hard to pay down debt. I would not think of the share repurchase program as something significant. It is a small way to return capital to our shareholders.

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

So I just wanted to go back just once again to the sequential improvement comment and just thinking about the back half of the year. As you mentioned, you are hopeful that the independent growth that everyone, of course, is focused on gets back within your 6% to 10% range by the end of the year. But is it safe to say that, obviously, given the solid quarter with it below those levels still today that kind of the back half of the year, you're expecting some improvement, but maybe not necessarily kind of baking that meaningfully into the 6% to 10% range in the back half?

Well, the way I would characterize that is that we are very encouraged with our growth. Like I said, we try not to get too excited about January. But certainly, for today, we're not dependent on growing our independent business any better than we are today to hit our guidance as far as EPS and EBITDA growth.

Okay, perfect, George. And then just on the M&A front. So clear that in terms of multiples and opportunities, Vistar over Foodservice is more of an opportunity today. But maybe can you just give us a little bit of a -- more of a high-level backdrop in terms of the types of entities that are within Vistar? Is there anything given that you have the majority of share in your markets? Like, is there anything super-needle moving, or is it more just kind of either new channels or rounding out? Just give us a little sense there, that'd be helpful.

If you just look where candy is important, you look where snacks are important, and you look where beverage is important, particularly specialty beverage, that's where we want to play. And we're in a significant number of those channels. But there are large channels within that, that we're not in. So we're always looking to be in, basically, every channel where that is important. And it's just no more complicated than that.

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

I guess, I'll throw in another question there on Vistar, given this strong performance there. I just am curious if you kind of step back, why you don't see more competition in this segment? And what are the barriers to entry, given how strong this continues to perform? Just curious maybe what sort of protects this business long term from new entrants? And maybe you can also talk about the minimum drop sizes that tend to occur in this segment. And also related to Vistar, maybe just update us on your dollar-store business. What kind of visibility you have into the contracts and the terms there?

First of all, as far as competition, we play in many different channels. And we have competition in every channel that we are in, and some are stronger than others. Some of the areas of business we're in, we have significant strong competition. But I just feel that we have such a assortment of product because we do hit so many channels. And when you have distribution centers that have 7,000, 8,000 SKUs and it's in a very narrow product base, I think it makes it pretty difficult to deal with. As far as drop size, that couldn't vary more than it does. We go everywhere from having a significant amount of business that we deliver on 52-foot trailers, and we have a significant amount of business where the orders are small to the extent that we have that delivered FedEx or UPS. So it's the whole gamut. And that's one of the reasons why you're seeing some fairly heavy increase in expenses and as far as expense ratio and some nice increases in margin as well. Our growth has tended to come from higher margin parts of the business that are also higher cost to serve. And we just want to continue to be able to service a customer all the way from somebody that needs a couple boxes to somebody that needs 1/4 of a truckload. As far as kind of drop size minimums, we don't really think in those terms. We just want to make sure that we're servicing real well and that the orders are profitable. As far as dollar stores go, it's a very active channel for us today. We have a lot of conversations going on. It's continuing to be a good growth area for us. We have a very large anchor customer who does a great job, and we feel we have a good relationship with. And we just look at it as a channel that we should be able to continue to grow.

Okay, that's very helpful. And then you brought up Roma. I guess, maybe just curious if you can give an update on how Roma is doing. And I would think that cheese is a big component of that business, and it's been deflationary for a while. Just curious how that impacts it. And if you're seeing any different trends developing with your Roma customers, just given the advent of more and more delivery options outside of what historically maybe was mostly a pizza category.

Yes, Roma does extremely well. Roma grows every year. Cheese is a big part of our business, and cheese grows for us every year. We are probably getting some benefit from some of the third-party delivery people who are out there since our customer base is primarily not heavy delivery. That tends to be more the chains that are fairly dominant there. But Roma is just a great business, it's a great brand, and we feel very good about it.

Your next question comes from the line of Andrew Wolf of Loop Capital Markets.

On Vistar, George, you noted some somewhat easy comparisons on the expense side, you went through that. Could you give us an update on the Memphis facility, the automated facility, how it's doing, its operational metrics? What the outlook is there for automation?

Sure. Although a rough start, it's doing extremely well, and it's given us the confidence to where we're going to be doing a second facility that will be automated, probably to a higher level of automation than the existing one. And we've secured that property, and we're moving forward.

Is that something that can lower the cost structure as, I think originally, you were planning to do these nationally within 5 years or something, a few years ago?

Yes, and we still have that planned. Actually, we would like to do it in much less than 5 years. As far as lowering our cost structure, I think it's how you look at it. Not necessarily lower the expense ratios for Vistar as a company, but it will lower our cost to operate in a pick and pack environment. It is still a higher cost to serve than most of our other channels within Vistar.

Okay, so you'd basically -- it helps the mix, and so you can get a better mix and get better unit profitability through pick and pack?

Correct. That's correct.

Okay. And I wanted to ask on Vistar. On the sales side, I was particularly surprised that theater accelerated because of the tough comparison you mentioned with Star Wars last year. Is that just candy and stuff like that? Or is it more kind of the work you're doing with some of the chains to help them serve food at the theaters, sort of, prepared food?

Well, December was a tough month. Those were very tough comparisons. We are continuing to penetrate these counts a little bit better. Not so much with picking up business that a competitor has, but just getting them to add to what their offering is. And we've got some tough comparisons coming up here in the month of February, where last year it was a little bit more vibrant from a product standpoint. But it's just a good channel, and we continue to do well with it. We've got good customers, and our people are always looking for those opportunities to expand the product offering.

And just one question for me on Foodservice, and a lot of good questions. Did -- the top line Foodservice accelerated nicely, which given the case growth in independents had to have come from the chains. And yet you had, it sounds like, pretty much on plan in selection and EBITDA. So should we take away from that that the chains -- chain business that you're adding now is much more profitable than -- or reasonably more profitable than had been in the past, either folks you're mixing out or folks you're bringing in?

Well, our mix didn't go as much to our benefit as it should. And no piece of chain business ever is at a level of profitability that's going to help your ratio, I guess, of EBITDA to sales. But within our independent category, we did well with margin and also our average case costs. We did real well in the more expensive case areas. So that also was a big help. So it was more of that than getting a real help -- significant help to the bottom line from chain business.

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

I was wondering if you could talk about with the robust growth really across all through your businesses or at least marginal same-store sales growth on your chain business, where you stand with capacity utilization across the businesses. And where you might need to commit capital either to consolidate or expand capabilities?

Yes, so we have capacity to manage growth. However, as I said earlier, we're going to continue to invest back in the business. And we'll be looking at some planned expansions throughout the back half of this year and next year as well. So growth driving expansions is a part of this business in the industry, and we think we do a very disciplined job of managing through that.

And from a regional perspective, can you give us an idea of where you are maybe capacity constrained or bumping up against your capabilities?

No, I'd prefer not to talk about specific regions on the call. But I can tell you, every area is important to us, as you can imagine, and we're going to pay close attention to all of them.

All right. And then looking at CapEx, your guidance for the year, is there any way you could parse out what's maintenance and what's growth as well as what your hurdle rates are for growth CapEx? And that's it for me.

Thank you. Yes, look, I'd say this: the vast majority of the CapEx is expansions in facilities, and then there's certainly good -- a good degree of maintenance capital and technology as well. And those investments go across both the Foodservice and broadline area as well as Vistar. And no, I wouldn't talk about our hurdle rates here. But I would tell you that we do a very disciplined job of studying and quantifying the value we'll get by investing every dollar of shareholders' money.

Your next question comes from the line of Bob Summers of Buckingham.

So I just want to dig back into the Foodservice investment in people, and you talked about how it's paying dividends, but leveraging it further. I think investors have an expectation of what the attendant case volume growth might look like. You probably have your own expectation that you won't share. But with that in mind, can you tell us maybe what percent of the opportunity you've captured from bringing these people on board and just trying to frame it on how we get back to the -- at least the 6% in independent case volume growth?

Well, I think that's a hard number for us to come up with. When you bring people on, you do move a certain amount of business to them. You want people to enjoy some success of writing orders, and I think it gets pretty jumbled up. What we have found is that if we hire good people and train them well and give them some business to start and they'll perform well for us. And particularly, if they have relationships and they come off of a 1-year no compete and they can utilize those relationships, they tend to even do a little bit better. And when we talk about our investments, it wasn't just in salespeople. There were parts of the country where we made increases in compensation to drivers and to warehouse people where we felt that we needed to do that. And in some of those areas, we've gotten some nice increase in productivity by doing that, some we didn't. But that's equally as important for us because providing good service today is really harder than it has been in the past. And that's really more of what we were referring to as far as investments that we've made. It's more in investments in warehouse people and drivers.

Okay. And then you talked about the importance of March. Just frame it for us. The later Easter, does that have any impact?

It probably helps us in the south. A lot of people that go south for the winter tend to come back in time for Easter. I don't think all in all, it really affects much of anything. It just makes your sales growth a little more volatile week to week. But I don't think it's really very impactful. Weather is the impact for us.

Today's last question will come from the line of Karen Holthouse of Goldman Sachs.

This is actually Alex on for Karen. Just one small question. Have you seen any disruption in sales trends during the government shutdown, particularly in the D.C. area?

We did not really see much of a change, no.

Thank you. I'll now return the call to Michael Neese for any additional or closing comments.

Thank you for your time today. We look forward to seeing everyone at the CAGNY conference down in Boca. We are going to present at 4:00 on February 19, and we look forward to heading down there. Have a great day. Thank you.

Thank you. That does conclude today's conference call. You may now disconnect.