Performance Food Group Co (PFGC) 2019 Q3 法說會逐字稿

Good day and welcome to the PFG Fiscal Year 2019 Q3 Earnings Conference Call. Today's call is scheduled to last about 1 hour, including remarks from 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, Darla, and good morning, everyone. We're here this morning with George Holm, Performance Food Group's CEO; and Jim Hope, PFG's CFO. We issued a press release regarding our 2019 fiscal third 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'd like to go over a few highlights from our third quarter results and I will turn it over to Jim and he'll discuss the financial results. And then I will come back and discuss the strategic rationale for our Eby-Brown acquisition, and then we will take your questions.

I'm pleased to report our third quarter and first 9 months results were in line with our expectations and we may remain on track to meet our annual outlook. Total cases were up over 5% for the quarter and nearly 5% for the first 9 months. Our third quarter total net sales were up nearly 8%, driven by Vistar and our independent case growth in Foodservice. The increase in net sales also reflects an increase in selling price per case as a result of inflation and mix. We experienced inflation of nearly 2 percentage points. This came especially in the center of the plate with poultry meat and seafood items and also in the produce category.

Vistar had another strong quarter with EBITDA up double-digits for Q3 and for the first 9 months, driven by strong sales growth in all channels. Corrections and travel and office supply performed very well. Vistar continued to enter and grow in new and existing sales channels. Their good-to-go market strategy has grown over the past several years and fueled double-digit sales growth this quarter. We're also generating double-digit growth in the corrections area. Our share in corrections is small and we have a long road way ahead of us for growth in this channel. In theater, Vistar had a tough comparison versus last year's blockbuster hit Black Panther. However, at the beginning of our fiscal Q4, Avengers: Endgame broke several records and grossed over $350 million domestically in the first weekend of showings. As a result, we expect to see our theater business bounce back and perform better in our fiscal fourth quarter than it did in our fiscal third quarter.

Turning to our Foodservice segment, we are pleased with our sequential improvement and the growth in EBITDA of over 6%. Net sales increased high single-digits, independent case growth was up 5.4% and Performance Brands reported high single-digit growth. We are pleased to have also experienced sequential improvement in our independent case growth from Q2 to Q3.

This is against the backdrop of experiencing flat to down same-store sales growth for independent restaurants. However, we do believe the overall health of independent restaurants remains solid. We remain committed to our field sales force and we believe these investments will yield strong future growth. We are making progress in our Foodservice segment. The segment still faces certain headwinds, specifically related to higher wage and labor cost and we expect to lap some of these higher costs during this year's fiscal fourth quarter.

In summary, we believe our strategic investments continue to be on track to support our long-term growth objectives. Both of our segments are showing good case growth and good EBITDA growth.

Now to highlight one of our important PFG Associates, I would like to acknowledge [Marino Vertin], who joined our company in 2015 as a driver with our Vistar Division and was later promoted to lead driver and trainer. Marino is based just outside of Chicago at our Vistar, Illinois operating company. In the last quarter, much of the Midwest experienced the coldest arctic outbreak in 2 decades. Marino was the behind the scenes go-to-person, making sure that our trucks were ready for the extreme temperatures and that our drivers were safely traveling to their destinations. We're thankful for associates like Marino whose unwavering dedication to our customers and colleagues is what makes PFG so successful. Thank you, Marino, for your tremendous customer service commitment.

I will now turn the call over to Jim, who will discuss our third quarter financial results in more detail. Thank you.

Thank you, George, and good morning, everyone. I'm pleased with our third quarter results. Total case volume increased 5.3% for the third quarter of fiscal 2019 compared to the prior year period, with underlying organic growth of 3.4%. Total case volume included a 5.4% increase in independent cases, growth in Performance Brand cases and broad-based growth across Vistar's sales channels. We are pleased to see sequential improvement in our independent case growth from the second quarter. Net sales for the third quarter of fiscal 2019 grew 7.8% to $4.7 billion compared to the prior year period.

The increase in net sales was primarily attributable to growth in Vistar 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. We witnessed a manageable amount of inflation, which was encouraging.

Gross profit for the third quarter of fiscal 2019 grew 8.2% to $604.7 million compared to the prior year period. The strong gross profit increase was led by case growth and from selling an improved mix of customer channels and products specifically 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 12.9%.

Operating expenses rose 9.4% to $545.5 million in the third quarter of fiscal 2019 compared to the prior year period. The increase in operating expenses is primarily due the increase in case volume and the resulting impact on variable, operational and selling expenses as well as increases in personnel and insurance expense.

We believe we have future opportunities to continue to manage expenses as we move forward. That said, we've made noticeable progress managing our corporate overhead costs. Net income for the third quarter of fiscal 2019 declined 4.2% year-over-year to $32.3 million. The decrease in net income was driven by higher operating expenses and an increase in interest expense, driven by higher average interest rates.

The effective tax rate in the third quarter of fiscal 2019 was approximately 26.1% versus 24.8% in the third quarter of 2018. The higher effective tax rate in our current third quarter was primarily due to prior year tax benefits, associated with share-based compensation.

The increase in depreciation and amortization was driven by our tuck-in acquisitions and Vistar and expected increases in depreciation due to CapEx investments in the business. We will see increases in interest expense and D&A in Q4 and heading into fiscal 2020 as a result of slightly higher average interest rates versus the prior year and increased borrowings and D&A as a result of Vistar's acquisitions and investment in our fleet.

We are committed to making strategic investments in our businesses, which we believe will yield long-term value to our shareholders. EBITDA increased 8.5% to $99.9 million in the third quarter of fiscal 2019 compared to the prior year period. For the quarter, adjusted EBITDA rose 11% to $106.1 million compared to the prior year period.

Diluted EPS declined 3.1% to $0.31 per share in the third quarter of fiscal 2019 over the prior year period. Adjusted diluted EPS increased 2.9% to $0.35 per share in the third quarter over the prior year period.

Turning to cash flow. In the first 9 months of fiscal 2019, PFG generated $260.5 million in cash flow from operating activities, an increase of $30.9 million versus the prior year period. For the first 9 months of fiscal 2019, PFG invested $93.1 million in capital expenditures, an increase of $19.9 million versus the prior year period based on several projects that we started in fiscal 2018 continuing into the current fiscal year we have mentioned previously.

We now expect CapEx to be approximately $140 million to $160 million in this fiscal year compared to our prior expectations of $150 million to $170 million. We will see some of our fiscal 2019 CapEx budget move into fiscal 2020, as a result of the timing of projects.

In the first 9 months of fiscal 2019, PFG delivered free cash flow of $167.4 million, an increase of approximately $11 million versus the prior year period. And our debt to adjusted EBITDA leverage came down 30 basis points to 2.6x.

During the quarter, we repurchased approximately 120,000 shares of common stock for a total of $4.1 million or average cost of $33.40 per share. As of March 30, 2019, approximately $240.7 million remained available for additional share repurchases. We will continue to execute our share repurchase program opportunistically throughout the year.

Turning to our outlook for fiscal 2019. We tightened our full year adjusted EBITDA growth to be in a range of 8% to 10%, given our first 9 months results. We also tightened our fiscal 2019 adjusted diluted EPS growth to be in a range of 12% to 16%.

In summary, our first 9 months results are on track with our outlook for the fiscal year. We're pleased with the strong top line growth in our businesses, the sequential improvement in Foodservice's EBITDA results and we believe the strategic investments we've made over the course of the last 2 years are paying off. Vistar continues to have an outstanding year of top line and EBITDA growth.

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

Thanks, Jim. Before we take your questions, I would like to share with you why we are excited about our latest acquisition of Eby-Brown, which closed late last month. Eby-Brown was a privately held leading US distributor of prepackaged candy, snacks, specialty beverage and tobacco products in the convenience industry. There are 3 key strategic reasons why we believe our acquisition of Eby-Brown will provide multiple paths for value creation over the next several years.

First, the convenience sales channel is large and growing. It has $237 billion of in-store sales, of which $39 billion is in the food service category. There are 58 billion visits that customers make each year, 83% of the goods purchased at c-stores are consumed within an hour. 65% are consumed immediately. This is very similar to our Vistar business.

Second, Vistar and Eby-Brown will have a much greater combined scale across the convenience products market. This acquisition will help Vistar strategically expand in the fast growing convenience channel, where there is significant overlap with suppliers and existing customers, across several product categories. Vistar and Eby-Brown combined will service over 75,000 convenience locations.

And third, we see innovative possibilities for our customers and new complementary growth opportunities for Performance Food Group, specifically in our Foodservice platform. The food and restaurant industry continue to evolve rapidly, approximately 2 meals being eaten away from home per day and consumed on the go. The grab and go trend of prepared meals, snacking and other initiatives makes it clear that convenience will play a very important role in the future of how consumers eat and when and where they eat.

To wrap-up, we feel good about our year-to-date progress against our strategic goals. Although, we have faced continued labor related headwinds in our Foodservice segment, we'll be lapping some of the higher costs as we go into our fiscal fourth quarter. We're excited about the future opportunities with Eby-Brown and our M&A pipeline remains robust.

With that, we're here to take your questions. Michael?

Thanks, Darla. We'll head to Q&A, please.

(Operator Instructions) Your first question is from Christopher Mandeville with Jefferies.

If we could start just maybe thinking about the cadence throughout the quarter, I think on independents you started-off very strong north of 6% in January early, clearly it softened a bit in February and then it bounced a little bit in March. But could you help us just in terms of any real quantification there? And then as it relates to quarter-to-date, how are things looking for the 3 main business segments?

Okay. When we look at the sales in the third quarter, January, I think we had pretty easy weather comparisons and it was the best as far as percentage growth month of the quarter. February, we ran into a little bit of weather headwinds. It was a tougher month around growth. March was good except for the mismatch of the Easter holiday. So it made it kind of choppy, but it was a better month. April, once again, choppy because of Easter, but it was a good month and May has started out good. So that will give you a kind of feel for the way it's gone. Vistar, March was their difficult month, but that was more the comparisons in the theater area and with the new Avengers movie, their business has been real strong. And then if you look at the national account part of our Foodservice business, really pretty similar to what our independent did, it's more probably weather comparison related but all in all, we think the quarter probably from a weather standpoint is probably a little better than last year.

George, if you strip out the noise from the Easter shift, would you say independents quarter-to-date are back north of 6%?

Definitely not. We're running about

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we ran in the third quarter.

Okay. And then my follow-up is just looking at the updated guidance and the implications for Q4. You have your easiest comparison of the year in terms of EBITDA and the gross profit dollar to OpEx growth gap. So I'm just wondering why we should be thinking about only a similar EBITDA growth rate at best in Q4 versus what we realized in Q3 when sounds like cases are largely the same. Vistar is off to a very strong start and then I think Jim, I heard you mention something about lapping a few cost pressures on labor at some point in the quarter. So is this just general conservatism, given what happened last year or is there anything you need -- that we need to keep in mind?

Thanks for the question, Chris. Yes, look we started the year with 7% to 10% adjusted EBITDA growth and we feel like that's our zone. We narrowed it now to 8% to 10%. We feel really confident in our business and we feel confident in that range. I believe our Foodservice segment is beginning to make progress. They still face some headwinds. Look, they're still facing higher labor costs as everyone in the industry is, but we're moving in the right direction there. Vistar had a tougher comp in Q4 versus the prior year and same-store sales growth isn't as robust as it was 2 years ago. So we feel good about 8% to 10% and we're going to stand on that guidance range.

Your next question is from the line of Edward Kelly, Wells Fargo.

Hey George, I just wanted to follow-up quickly on the last question about case growth trends. So at CAGNY, you sounded I thought pretty bullish around independents being in that 6% to 10% range. Things, obviously, slowed a bit since then, but you had new sales people coming in as well. I guess just your thoughts on the current trend of independent case growth relative to that goal and the contribution that you're seeing from the new sales hires and whether they are meeting your expectations?

Yes, it's a good question. Our new people I think are doing well and we've seen an impact from that. I think that's why -- partially why we had some sequential improvement from Q2. We're seeing as our sales force matures and our average weekly sales for our sales force has more than doubled in the last 10 years, so we're seeing some of our large sales people not growing as robust as before. So that's a little bit of a factor, not a big factor, but somewhat of a factor. And probably the biggest thing as we really dig into it, is the number of companies we have that have been really underperforming is higher and kind of the commonality with those companies is not so much geographic, it's more labor related and it's where we're having trouble attracting the right type of driver is -- by driver, I mean, truck driver is probably the biggest impact that we've had. But we still feel very good about our independent business. We feel good about our people. We're going to continue to add people and aspirationally we never want to be below 6%, but we actually feel like we're doing pretty good right now.

That's fair. And then just a quick question for you on the cost side. So costs this quarter were a bit higher than what I would have thought. I mean, obviously, a good EBITDA growth, but it's probably not truly reflective of the real growth of the business given what's going on still from a cost perspective. Can you just talk about how costs came in relative to your expectations? And then I guess, the biggest drivers of the increase and then you talked about -- sounds like, I guess, maybe beginning to see relief, forget some leverage, in Q4. So what drives that?

Yes. We don't hesitate to spend the money to make sure that we have the service we need because we feel like -- we want to keep a growth engine going. I would say our expense increased in the third quarter, our fiscal third quarter was disappointing and probably for the most part necessary and we are lapping some of these increases. So we do expect to get better, but we did expect to be better in the third quarter as well. We just have a lot of confidence in the growth side of our business. We want to make sure that we're adequately staffed to do that. And this is not your kind of labor market where people are readily available. So you've kind of got to dig a little bit to get the right people and you got to pay them right.

Your next question is from the line of Karen Short with Barclays.

Just a quick question following up on guidance for the year. So your fiscal year guidance of 8% to 10% implies a pretty wide range for 4Q. I'm getting arranged for 4Q kind of 5% to a little north of 11% on EBITDA. So maybe just a little color on the range and then I have 1 or 2 other follow-ups.

Yes, sure. Karen, you did that exactly, right. Look like I said, I think our Foodservice segment is making progress, but they still got some headwinds that they're facing. Labor is still an issue. Vistar has a tough comp as I mentioned in Q4, and there's a lot of things going on here and I feel good about a range of 8% to 10% for the year.

Okay. That's fair. And then I guess on the industry in general you know, George, you have been pretty consistent on what you've been saying regarding doors and I guess, same-store sales and one of your competitors is obviously, saying that has been fairly consistent, the traffic has been weak. So I guess maybe, I'm not -- can you just be a little clear, are you seeing same-store sales decline and doors close in your independent and I appreciate that you have the truest definition of independence of all of you guys in the space. And then also maybe a little color on what you're seeing on the national side in terms of strength or maybe a little, it sounds like maybe a little less strength.

Yes. It's always so hard because we have different people to put out numbers and they don't seem to be real consistent and I appreciate that because it's hard to get. We are seeing slowness in the chain business again. We get these little signs of life at times, but for the most part right now of late, it's been same-store sales declines at least for their purchases. Then when you look at our independent business, we've really experienced this for over 2 years now where we're growing our number of customers at a very good rate. We are growing our number of lines that we sell those customers, but the cases per line that we sell them is behind the previous year. And that's just the reality of what we see. It's very hard to determine if there are increased or decreasing number of units, but as far as increasing the number of independent restaurants that we sell we're very consistent with that and we're not seeing any decline in our ability to secure a new business.

Okay. And then just last question for me on Eby-Brown, in general. I mean, obviously it sounds like it is a great acquisition, but maybe a little color on how long you think it'll generally take to really start getting traction on reverse revenue synergies meaning selling more of your food categories to some of their customers?

Well, the biggest thing that we looked for is to be able to take our Foodservice offerings into the convenience store and I don't know how long that will take. We've met with customers already and it sounds positive, but these things don't happen overnight. And then the combination of the purchasing capability of Vistar with an Eby-Brown, I think, is going to be real positive for us. So where we see the biggest potential though immediate is probably in the Foodservice area.

And our next question is from the line of John Heinbockel, Guggenheim Securities.

So George, maybe talk about where do you think the biggest cost I won't say reduction, but cost containment opportunities are out in the field in the operating companies. And the balance between growth and cost culturally, right, there does seem to be an opportunity for you to be a little sharper on the cost side, but you don't want to go too far and compromise growth. So maybe talk about that tension and then where the biggest opportunities are in the opcos?

Well, the opportunities would be in the areas of delivery and warehouse. And it's a balance of making sure that you have the proper amount of people to service the business you have. And I feel that we're in an environment where it takes more people. The average worker today, I'm saying the average one, is far less inclined to want to work overtime than what we have experienced in this industry for many, many years. The ability to give him a decent amount of overtime made the job more attractive, and today that makes the job less attractive, if they are getting overtime. So we're just having to staff heavier, and that takes time when you've got unemployment at the lower rate as it's at today. But I think the money that we're investing in those 2 areas are going to be very good for us. And it's our growth that allows us to invest that money, and when you're growing cases above 5%, it's not just a matter of replacing employees. You have to be bringing on enough people to where you have the growth. And then that growth needs to be greater than normal because of that -- we just don't have the ability to require that much overtime from them. So balancing that, I mean, I think that's as good a question as you can ask, because that's why we're working hard to do is balancing it. And I would have expected us to be getting some leverage out of the case growth that we have today. And so far we haven't been able to get there. But we can still put out the EBITDA growth without that by just keeping that growth engine going.

And then as a follow-up to that. If you think about getting better in those 2 areas: number one, process improvement, probably you may be sharing best practices among the opcos; and two, technology. Technology probably can't help you on delivering too much. What about helping you in the warehouse? Is there more investments to be made to do a little more automation or the capital efficiency isn't there.

Yes. We have a good deal of initiatives going on right now in warehouse and delivery across both Performance Foodservice and Vistar. And we're seeing some early signs that that will help us. And we're actually doing some things to make the driver's job a little bit easier, and how we load trucks. So I think that's going to be a good help for us. But as far as to when that starts to show a big benefit, it takes a while to get these initiatives across several companies in a growth environment.

Our next question is from the line of Judah Frommer with Credit Suisse.

Thanks for the color on the Q4 EBITDA growth impacts. Can you help us at all with how to think about Eby-Brown coming into the numbers in Q4? Any effects there on the Vistar segment, and we're not looking for 2020 guidance at this point, but you do have 3-year targets out there. So can you help us with impacts into early next fiscal year as well?

Yes. As we said before, in the first year it's neutral to slightly accretive and at the tail end of this year. I think from a adjusted EBITDA standpoint, it's negligible to small. At the same time, I will tell you we're very excited about what Eby-Brown brings to the PFG portfolio and the long-term strategic vision that it helps fill out. Eby will be very helpful to us in the long-term.

Okay. And then maybe more on Foodservice, if I think back over the last few quarters, you guys have clearly brought on a lot of salespeople over probably the last 18 months. You did retain a bunch of labor through the holiday period that you wouldn't typically do, but it sounds like you're being hamstrung by drivers. Is that the right way to think about it? And would you have done anything differently, if you could have anticipated the driver piece? And is there any relief on the freight side that's offsetting that?

Well, I think we're right on track actually on the driver side, it's just a little bit more expensive in both delivery and warehouse. We're investing in those 2 areas as we would expect. It's a little more costly and we're trying to deliver the growth. As George mentioned in his opening remarks and his comments, we're going to support the growth. We had a little bit of weather headwind to work through in the quarter too. So I feel good about how Foodservice sequentially is improving and yes we believe that they'll wrap against some easier history at the tail end of the year, and we look forward to a continually improving year for them next year.

Okay. On the inbound freight side, anything you call out?

We're still doing really well with inbound freight, we have good relationships with all of our carriers. We have built solid partnerships. I won't go into some of the details about what makes it work for us other than -- I'm really pleased with how the inbound logistics team and all of our operators in the field have done in that area.

Our next question is from Marisa Sullivan, Bank of America Merrill Lynch.

Just want to start on independent case growth. Can you just give a little bit more detail on what you think drove the improvement? I know that that the sales force investments were part of it, any other things to call out? And then you disclosed the mix of independents as a percent of total Foodservice. And it's been trending lower year-over-year. Can you just give us a little bit more color on what's driving this and how you anticipate that trending in future?

Well, I think if you look at our sequential improvement, probably the biggest driver of that was the new people and putting out a better level of service than we put out in calendar Q4, fiscal Q2. As far as the mix, we've had some better growth in our national account area, but our cases are growing probably -- if you get in the third quarter, we definitely had higher sales growth, the national account cases than we did an independent. But fortunately, we also were able to increase our gross profit per case just because of the additional margins we've been able to get in our independent areas. I'm not concerned about any real change in mix negatively impacting us.

Got you. And then I'm wondering if you can provide a little bit more color on your outlook for inflation in the fourth quarter and if you still feel like it should be at manageable levels?

Yes, I think it will still be manageable. I don't see any reason for it to be much different than it is today. All the ups and downs and puts and takes seem to be averaging out to around 2%. That's very manageable and frankly encouraging.

Got you. If I can sneak one more in just on Vistar, understand you have tough comparisons in the fourth quarter, but you did call out the strong box office start. So how do we think about the balance of those, and Eby-Brown coming in and any other puts and takes in 4Q?

Yes. Well, just that, I mean, April was an excellent month. The comparisons last year, May and June were very good sales months and we'll just have to see. I mean, we don't have a crystal ball with that but we are off to a great start. April was just excellent for Vistar.

And our next question is from the line of Vincent Sinisi with Morgan Stanley.

I just wanted to ask about the new sales folks who have been coming off the non-compete. I know kind of the fiscal 3Q was really the inflection there. But can you just give us a little sense for -- was it the large majority have started, how many more might be rolling off, are there non-competes over the next couple of quarters? And then, as you guys mentioned some of that due to the new sales folks for the sequential improvement, typically like how long until most folks get into really kind of the normal mode?

Yes, I'm not so sure that -- we can't quite throw a blanket over all of them and do the same. We have people that come with us. They have a no compete. We put them into a new area and by the time their no compete expires, they don't want to go back to their old area, they're doing extremely well. And we have people that don't produce much during that year and then you put them into the area that they're used to being in and they do extremely well. And then all kinds of different ones that are in between there and some that just can't adjust. As far as how long it takes? I think it takes longer than it has in the past, but if you've got good quality people and their noncompete expires and it takes them several months to really get traction in our business that works for us. We're fine with that.

Okay. All right, George. And then, maybe just going to the larger stocks around kind of the C-store channel. Now of course, with the Eby-Brown acquisition, I guess with the due diligence that you guys did before purchasing it, how you think kind of the C-store channel focus overall fits into the kind of the future growth profile? Does it have more of a kind of focus within your M&A opportunities or just how should we kind of think about that going forward?

Well, we think there's a good Foodservice opportunity. It's growing and it's a big business today. We already do particularly in certain parts of the country, we do pretty well with Foodservice and convenience. It gives us a big channel for Vistar to play in and the company is very well managed and has done a great job of becoming the largest supplier as this has gotten into new channels. This is a very large one. It's a channel where they can grow for many years and still have a big opportunity in front of them.

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

So I wanted to get into the labor stuff. It sounded like, George, you said overtime, it sounds like we're sort of a traditional carrot and I guess it's not as appealing. Are there other payment schemes that you can kind of switch to or trying -- like I'm particularly thinking of activity based pay. Seems like it might fit with what you're describing.

Yes, I mean, we're an activity based pay just about everywhere today and it's been very effective for us. And I think it will continue to be very effective for us. Most people that's still what they desire, the overtime issue really, we're going to more people that work like a 30-hour week and it's something that we're testing. We're testing it in several places and that's working well for us.

So is it more that when you add new [PFG], you're just adding new people and they come on less productive. Like will they get up to a productivity ramp level you need or is it just there's something inherently productive having more people working at a warehouse even, usually, working less hours?

We're finding as people work less hours per hour they are more productive and that's why it's just making sense for us today to have more people.

Got it. All right, moving to a couple of follow ups on Eby-Brown, I think you mentioned the category overlap. Is that where you're going to have the biggest synergy sort of out of the gate just on the buy side? Are there any share customers where you get decent -- where you can increase drop sizes or are they kind of....

Yes. What we see happening as we develop with this existing customer base is, there are some people that don't have a large food service offering and all of that product that they use will come from Eby-Brown and then we'll have situations that are similar to what we have in theater today, where a theater has a broad offering of product and we deliver them out of Vistar this and we deliver them out of Performance Food Service as well. So somebody that has a broad offering of Foodservice product, we would more than likely deliver them out of both companies.

And just last thing is also on Eby-Brown, in terms of new customer acquisition and growth, could you just sort of maybe flesh out a little bit? What channels you think you'll pursue in a, obviously, convenient store? I mean is there an opportunity with the dollar stores now that you're in the tobacco side of things and so on?

Well, we feel that where we've been restricted and not able to be the supplier to a company that is in the convenient business and also in the tobacco business this gives us a lot more flexibility to do business with those people.

Your next question is from Greg Badishkanian with Citi.

Hey guys, it's actually Fred Wightman on for Greg. In the past you've talked about getting more active from the M&A side within Vistar. I mean, obviously, some progress here, but if we just think sort of near term, should we just be thinking about more tuck-in size deals or are there some decent size deals that are still in that pipeline you talked about?

Yes, we have a very good pipeline today of acquisitions. We feel as good about it today as we ever have and this gives us more opportunity to make acquisitions in the Vistar side of our business.

Okay. Then you had talked earlier about some of the mix changes and the higher growth of the national accounts, when you look at the competitive backdrop for those national accounts or chain accounts, is there any sort of change versus what you were seeing last quarter?

No, not versus last quarter. There's not any dearth of opportunity out there to bring in national account business. It's just making sure that they're the right fit with our company, they're the right fit with our locations and that we can secure that business at the right, either, margin or fee.

Okay. Then for the repurchase program, is the sort of $4 million to $5 million per quarter the right run rate going forward, or anything that would sort of cause that to change?

Yes. I don't think I have given a run rate before, but I've always said, it's going to be small and it's about eliminating dilution from LTIP. And I think we'll stay with that answer and the best way to think about it is, it's not going to be large, it's going to be reasonable and small.

Your next question is from the line of Kelly Bania with BMO.

George, just wanted to follow-up on, on service levels, I think you mentioned they were better than last year, but maybe just talk about where service levels are, where fill rates are? And as you think about these elevated delivery and warehouse expenses, maybe what kind of investments you need to make over the next couple of years to get those to where you are happy with them?

Well, right now, we're running the highest fill rates that we've ever run. We're doing extremely well and I'm not -- to compare them to last year, I mean, last year we were struggling. I mean, they weren't paid by any means, but we're struggling. But I didn't compare them to any period of time that we've had and we're doing better right now. And that's why I say that that the investment we've made in people was a very good investment.

Okay. I guess and -- but as you think about these delivery and warehouse expenses, do you expect these to kind of flatten out, I guess, on a year-over-year basis or do you think you have to continue to make investments there to maintain these type of service levels?

I would say that we've already made the investment.

Okay. And then maybe Jim, just can you quantify the comment you made on the interest and the D&A that you're expecting. I think you mentioned the fourth quarter and into next year. Can you just quantify that a little bit for us?

Yes. We'll have a small increase in interest expense rates, just like we experienced in Q4. And I think we all saw the market go up and LIBOR move up a little bit. Look, it's not significant. I wanted to call it out. It'll continue on just as it is right now.

Your next question is from the line of Todd Summers from Buckingham.

It's Bob. Actually, Todd is my evil twin. But just a question on gross profit dollars. So given the sequential acceleration in inflation, I thought the gross profit dollar growth could be a little bit better. So maybe if you could decompose the impact of inflation both on incremental dollars and then rate and maybe if there was something else going on in the gross margin line?

We feel good about our gross margin line and the margin growth we delivered on sales. Inflation was slightly helpful at 2% and I think we got good results out of mix and focusing on the right customer base. So I would expect that to continue, and see the same thing going forward through the rest of the year.

And then just dovetailing back to M&A and I think that you've been pretty consistent here over recent memory about how that market seems to be opening up. Clearly, the Eby-Brown you got the deal over the goal line, I guess is there some way to quantify you know other than just sort of the best it's been in a while, quantify what you have potentially in the pipeline and then what it takes to get those done from here?

Yes. I don't think there's a way to quantify it. I think that I can make the statement that our pipeline is really robust, that we're very careful, about what we do. Typically, once we reach an agreement with people, we get it over the finish line. But they're never easy. They always take time. But I just haven't had this level of interest from people as we have today.

I mean, what do you think is driving that? I mean I think there are some transactions out there that have some pretty attractive EBITDA multiples attached to them. Or is it in some cases people are -- you know because of I would say a market that's being dominated by better well capitalized operators that their businesses are under pressure. And so that's pushing them to the door? If you had to favor one of those 2 answers or is it a combination of both?

No. I think sometimes when people are ready, they're ready. You know maybe it's generational. Maybe they have something else that they could do, with the money other than run the business. In many instances in the Vistar business, there's just nobody to take that business and run with it once the current leadership is no longer there. And those are the people that we either hear from or we contact and those are the ones that work the best for us.

And our final question is from Ajay Jain with Pivotal Research Group.

Actually, most of my questions have been answered already. But follow-up to some of the earlier questions on independents. I also had kind of an industry-wide question, specifically based on the backdrop for net unit growth of independents and on traffic trends? And your results, obviously, reflect strong independent case growth but based on what you're seeing, was there any noticeable shift in the third quarter and then more recently in the current quarter, again based specifically on net unit formation and customer traffic for independents in general?

Yes. I don't think we have great insight into that. I mean there's people that spend a lot of time and money determining what those shares are, and who's doing well and who isn't? I think that our fiscal third quarter can always be impacted by weather comparisons. It was not Easter comparison. We had a record week just last week and places were busy. I mean, I go out myself most of the time and places appear to be real busy. I just think at the same-store sales level, it's just been tough for people the last couple of years. And I think labor has impacted the restaurant to some degree as well. Some people have a limited amount of business they can do, because they have limited labor to handle that business.

And there are no further questions at this time.

Thanks, Darla. We look forward to seeing everyone at the BMO Conference next week. Have a great day.

This concludes the PFG Fiscal Year 2019 Q3 Earnings Conference Call. You may now disconnect.