PFG (PFGC) Q1 2027 Earnings Call Transcript

DATE

Wed, Nov. 4, 2026

CALL PARTICIPANTS

• Senior Vice President of Investor Relations for PFG - Bill Marshall
• PFG CEO - Scott McPherson
• PFG CFO - Patrick Hatcher

TAKEAWAYS

• Net Sales -- $18.0 billion, representing 5.5% growth driven by organic case volume increases, recent acquisitions, and selling price increases from inflation.
• Adjusted EBITDA -- $528 million, growing 10% due to gross margin expansion and efficiency initiatives that offset higher fuel expenses.
• Adjusted Diluted EPS -- $1.32, an 11.9% increase reflecting higher operating profit and lower interest expense.
• Gross Margin -- 12.1%, expanding 33 basis points supported by procurement initiatives, inventory management, and higher Performance Brands penetration.
• Total Case Volume -- 4.2% growth, led by expansion in the independent Foodservice channel and new account wins in the Convenience segment.
• Independent Foodservice Case Volume -- 7.8% total growth, reflecting a combination of 5.5% organic growth and contributions from the Cheney Brothers acquisition.
• Foodservice Segment Net Sales -- $9.6 billion, rising 5.0% due to strong independent case volume and higher selling prices.
• Convenience Segment Net Sales -- $6.9 billion, increasing 5.4% as new chain customer wins like Love's and RaceTrac offset a shift from cigarettes to alternative nicotine products.
• Specialty Segment Net Sales -- $1.4 billion, reflecting 10.3% growth driven by strength in vending, office coffee, and grocery retail channels.
• Total Cost Inflation -- 3.4%, showing a modest deceleration from the fourth quarter of fiscal 2026.
• Foodservice Product Inflation -- 0.5%, significantly lower than previous quarters due to deflation in poultry and cheese and decelerating beef inflation.
• Convenience Branded Programs -- 11% case volume growth, leading to nearly 15% sales growth for tailored foodservice offerings like pizza and chicken in convenience stores.
• Performance Brands Penetration -- 51.0%, representing the percentage of cases sold to independent restaurants from the company's exclusive brand portfolio.
• Net Fuel Expense Impact -- $16 million, representing the cost after surcharges and a hedge covering approximately 15% of estimated fuel use.
• Operating Cash Flow -- $89.3 million used, an improvement from a $145.2 million use in the prior year period due to better inventory purchase timing.
• Capital Expenditures -- $53.9 million, focused on warehouse technology and fleet safety as part of a plan to stay below 70 basis points of net revenue.
• Net Debt Leverage -- 3.5x, sitting at the top of the company's 2.5x to 3.5x target range with management prioritizing debt reduction for the remainder of the fiscal year.
• Q2 Fiscal 2027 Net Sales Guidance -- $17.0 billion to $17.2 billion, reflecting the lapping of major convenience customer wins.
• Q2 Fiscal 2027 Adjusted EBITDA Guidance -- $490 million to $510 million, as management expects fuel and inventory headwinds to persist.
• Full Year Fiscal 2027 Net Sales Guidance -- $72.5 billion to $73.0 billion, which includes the benefit of a 53rd week in the fourth quarter.
• Full Year Fiscal 2027 Adjusted EBITDA Guidance -- $2.125 billion to $2.225 billion, representing 12.7% growth at the midpoint.
• Fiscal 2028 Targets -- $73 billion to $75 billion in sales and $2.3 billion to $2.5 billion in Adjusted EBITDA.

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RISKS

• Scott McPherson stated, "Today's consumer environment remains challenging, but stable," noting that industry restaurant traffic has been running down approximately 2% according to Black Box data.
• McPherson noted that higher gasoline prices, which averaged more than $4 a gallon during the quarter, added pressure to household budgets and impacted convenience store foot traffic.
• Patrick Hatcher indicated that the Specialty segment faces margin pressure due to higher fuel prices and a reliance on third-party carriers in the small parcel channel.

SUMMARY

Performance Food Group Company (NYSE:PFGC) reported growth in net sales and Adjusted EBITDA for the first quarter of fiscal 2027, driven by market share gains in its independent restaurant and convenience channels. Management reported that the company is successfully navigating a sluggish consumer environment through procurement savings and the expansion of its high-margin Performance Brands. The company stated that it remains on track to achieve its multiyear financial targets through productivity gains from artificial intelligence and automation technology in its warehouses and fleet. Management also confirmed that it is preparing for the onboarding of a significant new chain customer, which is expected to accelerate volume in the second half of the fiscal year.

• Management plans to onboard three of the four geographic regions of Jersey Mike's starting in February, which is expected to drive higher Foodservice volume in the third and fourth quarters.
• The company targeted $125 million in procurement savings by the end of fiscal 2028, with savings expected to be spread evenly across fiscal 2027 and 2028.
• Scott McPherson stated, "We continue to expand our use of AI-enabled routing to improve fleet utilization and route efficiency while deploying AI-powered inventory drones and camera technology to improve inventory management."
• The sales force expanded by mid-single digits in the first quarter, supporting a 5% growth rate in new account wins for the independent restaurant channel.
• Management noted that the CustomerFirst digital tool has seen rapid adoption, helping to drive a third consecutive quarter of increased penetration into existing accounts.
• Specialty segment results were impacted by the renegotiation of long-term contracts, which management stated will provide increased profitability over the three to five years of the agreements as volumes grow.

INDUSTRY GLOSSARY

• Performance Brands: Performance Food Group's proprietary private-label product lines which typically carry higher margins than third-party brands.
• LIFO: Last-in, first-out, an inventory accounting method where the most recently produced items are recorded as sold first.
• Independent Cases: Foodservice product volume sold to local, non-chain restaurant customers, which generally provides higher profitability per case.
• Adjusted EBITDA: A non-GAAP measure that adjusts net income to exclude interest, taxes, depreciation, amortization, and other non-recurring or non-core expenses.
• ABL Facility: An asset-based loan facility, which is a type of revolving credit line secured by company assets such as inventory and accounts receivable.

Full Conference Call Transcript

Operator: I would now like to turn the call over to Bill Marshall, Senior Vice President of Investor Relations for PFG. Please go ahead, sir.

Bill Marshall: Thank you and good morning. We are here with Scott McPherson, PFG CEO, and Patrick Hatcher, PFG CFO. We issued a press release this morning regarding our 2027 fiscal first quarter results, which can be found in the Investor Relations section of our website at pfgc.com. During our call today, unless otherwise stated, we are comparing results to the results in the same period in fiscal 2026. Any reference to 2026, 2027, or specific quarters refers to our fiscal calendar unless otherwise stated. The results discussed on 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.

Our remarks on this call and 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. With that, I would now like to turn the call over to Scott.

Scott McPherson: Thanks, Bill. Good morning, everyone, and thank you for joining our call today. We began fiscal 2027 with a strong first quarter, highlighted by consistent top-line growth and continued margin expansion, despite the challenging economic environment. These results reflect the strength of our organization, our consistent execution, and the dedication of our more than 44,000 associates. This morning, I will touch on the backdrop in the food away-from-home market, cover strategic highlights for our business segments, and turn it over to Patrick to walk through the financials for the quarter and our outlook for the remainder of the fiscal year. Today's consumer environment remains challenging, but stable.

Restaurant traffic continues to run down approximately 2% according to Black Box, as consumers remain value-conscious and selective with discretionary spending. At the same time, gasoline prices rose throughout the quarter, averaging more than $4 a gallon, adding further pressure on household budgets. Despite the softer industry backdrop, we continue to see opportunities to gain share and outpace industry growth trends. Our organizational focus to win new accounts, increase business with existing accounts, and find new avenues for revenue and margin growth continues to pay dividends. In the quarter, the organization produced 5.5% revenue growth with contributions from all three segments.

Additionally, we saw gross margins improve by 33 basis points, supported by our procurement initiatives, brand penetration, and inventory management. I am proud of our sales and purchasing organizations. Their strong relationships with our customers and vendors, effective use of technology, leverage of exclusive brands, and commitment to service continue to differentiate PFG and drive profitable growth. Much like our intense focus on growth, the organization's operational leverage remains key to our success. Central to these efforts are our technology investments, focused on three areas that we believe can drive meaningful productivity gains and greater operational leverage over time. The first is operational technology.

We continue to expand our use of AI-enabled routing to improve fleet utilization and route efficiency while deploying AI-powered inventory drones and camera technology to improve inventory management and further strengthen our safety culture. Combined with goods-to-person automation and more advanced slotting capabilities, these technologies are helping us build a more efficient and scalable operating model. The second pillar is data. We are working with an external AI partner to create a common thread across our item, customer, and vendor data. This foundational work is important because it will allow us to better identify and capture opportunities across procurement, inbound logistics, and ultimately synergies across our segments.

Finally, we continue to see rapid growth in the organic adoption of AI across our workforce. Our associates are increasingly using AI to simplify transactional and administrative work, improve access to information, and increase productivity. We are early in this journey, but we believe the combination of operational technology, a stronger data foundation, and broader AI adoption can become an increasingly important driver of productivity and margin improvement over time. We witnessed some of these benefits in the quarter and expect the continued progress to be a driver in the 50 basis points-60 basis points of margin improvement outlined in our three-year plan. Let's move to some specific highlights from our three operating segments, starting with our Foodservice business.

Our independent case growth remained strong in the first quarter, posting 7.8% total growth, bolstered by a 5.5% increase on an organic basis. On a two-year stack, organic independent cases have increased over 12% for the second consecutive quarter. This growth is coming from a combination of new account wins and increased sales to existing accounts. New account growth continues to hover near 5%, representing a dominant factor in our share gains and case volume increases. With that said, we are very pleased to see a third consecutive quarter of positive penetration into existing accounts, driven by an increase in lines per drop.

This reflects increased wallet share with existing accounts, helping to offset lower foot traffic trends for the industry. Our continued success in gaining share with independent restaurants is led by our outstanding sales force, which we continue to expand by mid-si ngle digits again in the first quarter. Our ability to consistently attract growth-minded sales leaders, arm them and our customers with AI-enabled sales tools, Performance Brands, and great service is central to our ability to consistently win share. During the quarter, Performance Brands were nearly 51% of our cases sold to independent restaurants.

As a frame of reference, when we acquired Cheney Brothers, our Performance Brands were less than 50% of the cases sold to independent restaurants, as our team has done an excellent job expanding and selling that piece of our business. I want to take a minute to dive a little deeper into our sales and customer-facing technology called CustomerFirst. This technology has continued to grow in its capabilities, quickly becoming a critical tool for both our customers and our sales force. With AI-enabled search features, CustomerFirst has the ability to translate menus and recipes, and seamlessly facilitates two-way communication with our customers. The success of the CustomerFirst tool is captured in the results.

We have seen significant growth, outperformance for our customers sharing both a digital and direct ordering relationship with their account managers, and quick adoption of new functionality added to the platform with more to come. Shifting to our chain restaurant business, we continue to outperform the industry with organic case volume just slightly negative in the period. We would expect a similar result in the second quarter, followed by an acceleration through the third and fourth quarters as we begin onboarding Jersey Mike's in February. We are excited to bring Jersey Mike's into the PFG family.

As a reminder, we are adding three of the four geographic regions of Jersey Mike's, and it comes with margins in line with our overall chain business. Taken together, our Foodservice segment delivered a solid start to fiscal 2027 with mid-single-digit revenue growth and double-digit segment adjusted EBITDA growth. Turning to our Convenience business, we continue to see the benefit of new account wins that rolled on early last year. As we hit the end of the quarter, we began lapping the addition of Love's, and we will start lapping RaceTrac in mid-December.

Our Convenience business has benefited from the total PFG platform, which is the only U.S. convenience distributor that brings broad-line foodservice capabilities to the traditional convenience distribution model. We believe this combination has been instrumental in our new account wins and a driver of our revenue and profit growth since PFG acquired Core-Mark. An excellent example of our success has been the investment behind branded programs tailored to the Convenience space. These programs span a variety of product offerings, including pizza, chicken, Asian, and barbecue. During the first quarter, case volume associated with our branded programs increased 11%, producing nearly 15% sales growth on those programs in the period.

We plan to expand these programs and drive sales to both existing and new accounts. Our research has shown that convenience stores with a foodservice offering have outperformed the broader industry, making these programs appealing to a range of convenience customers. Overall, the Convenience segment posted another solid top-line quarter with 5.4% sales growth through a combination of 4.1% case growth and low single-digit price mix contribution. This growth came despite a sluggish backdrop for total industry in-store sales, as higher fuel prices have had an impact on both foot traffic and in-store purchase behavior. Core-Mark's ability to pick up market share and expand the foodservice programs I just discussed have provided consistent growth despite the industry challenges.

In the prior year period, Core-Mark benefited from candy inventory holding gains and promotional activity in the alternative nicotine space that did not reoccur in the current period. As a result, segment EBITDA growth was below recent trends, though that should recover as these items normalize. Looking ahead to the back half of the fiscal year, once we have fully lapped the large customer wins, we would expect Convenience segment revenues to resume the historical run rate of low single-digit growth, with segment adjusted EBITDA increasing at a high single digit to low double-digit pace. We are very optimistic about the outlook for our Convenience segment despite the industry challenges I mentioned earlier. I'll finish up with our Specialty segment.

Top-line momentum for Specialty remains strong, with double-digit revenue growth for the first quarter. We have seen particular strength in our sales to vending and office coffee, including micro markets and micro kitchens, which continue to be a strong avenue of growth for Specialty. We also saw a nice rebound in the movie theater space, which together with our concessions and hospitality business, make up the entertainment channel. We expect the entertainment channel to remain robust in the upcoming quarter due to a strong movie slate hitting theaters later in the quarter. Grocery retail, a channel that we have expanded in recent quarters, also posted solid double-digit sales growth in the period.

Grocery retail is expected to continue with solid revenue growth through the fiscal year. While Specialty was our fastest-growing segment on the top line, non-reoccurring candy inventory holding gains, competitive pressure, and higher fuel prices are weighing on margins. Fuel has an outsized impact on Specialty's expense lines due to heavy use of third-party carriers, particularly in the small parcel channel. We expect Specialty to continue to see margin pressure in the second quarter, with strong profit results in the back half of the fiscal year as we begin to lap higher fuel expenses starting in March. To summarize, we started fiscal 2027 with strong top-line performance in a choppy external market and made solid progress in margin expansion.

I'll now turn it over to Patrick, who will review our financial performance, include some details around our productivity and efficiency efforts, and guidance. Patrick?

Patrick Hatcher: Thank you, Scott, and good morning. We have a number of exciting initiatives underway at PFG, which are driving top-line outperformance in the market and expanding our margin profile and profit growth. I'll start with some details on a few projects that are helping our profit performance before reviewing our results and discussing our financial guidance for 2027. As we announced at our Investor Day in May of 2025, we have undertaken a comprehensive review of our procurement activities with the goal of benefiting from our purchasing scale and enhancing our vendor relationships.

Fiscal 2026 was a foundational year in these efforts, and through data analysis focused on our Foodservice businesses, we were able to begin discussions with our vendors to negotiate around our purchasing programs. During the first quarter of fiscal 2027, we saw the savings from these efforts steadily increase month to month. We expect these savings to be spread evenly through fiscal 2027 and 2028. By the end of fiscal 2028, we are confident the savings levels will be at the upper end of the range we provided at Investor Day, or about $125 million.

We expect a combination of our typical positive gross margin mix shift in our underlying business, plus these procurement savings will generate consistent gross margin improvement over the next two years and beyond. In addition to our gross margin focus, we continue to invest in technology to accelerate our operating margin efficiency. As Scott mentioned, this includes routing efficiency software to improve our transportation costs and technology in our warehouses to minimize shrink, reduce obsolescence, and automate certain procedures. We have also added technology in our trucks and warehouses to improve safety. Last quarter, we called out improvement in our safety metrics, which saw a reduction in accidents and injuries.

The benefits from these gains continued in the first quarter and were reflected in our lower insurance accruals. These are just a few examples of the many work streams we have underway, and we are excited for what the future holds. With that, let's review some financial highlights from the quarter before turning to our outlook. PFG's total net sales grew 5.5% in the first quarter, with growth in all three operating segments. Total company cases increased 4.2% during the quarter, highlighted by the 5.5% organic independent restaurant case growth. Total company cost inflation was approximately 3.4% for the quarter, a modest deceleration from the fourth quarter, which was in line with our expectations.

Foodservice inflation was 0.5% in the quarter, as the deceleration that we highlighted on our last earnings call persisted through the quarter. Lower levels of Foodservice inflation were the result of continued deflation in chicken and dairy and lower levels of inflation in beef. Through June, beef inflation had been running at a double-digit pace. This decelerated through the three months of the first quarter. We now expect Foodservice inflation to trend at the bottom end of a low single-digit range for the full fiscal year. While this is lower than we had previously anticipated, we view this as manageable and what we contemplated in our guidance.

Specialty segment cost inflation was up 4.9% year over year and just slightly lower than the prior quarter. Convenience cost inflation was 6.5% year over year. Similar to Specialty, this was slightly lower than in the prior quarter. The inflationary environment has been dynamic over the past several years. We remain confident in our ability to handle a range of outcomes. We expect the overall inflation rate to remain in the low to mid-single-digit range for fiscal 2027. Moving down the P&L, total company gross profit increased 8.5% in the first quarter, representing a gross profit per case increase of $0.30 as compared to the prior year period.

This improvement was driven by positive mix shift, execution of our procurement initiatives outlined earlier in this call, and a continued growth of our Performance Brands. We remain very pleased with the gross profit results, which we believe demonstrate our ability to execute our priorities outlined in our three-year plan. Our operating expense rose in the quarter due to several factors, including elevated diesel prices, which have remained well above levels from last year. As we discussed last quarter, our team has evaluated several ways to mitigate higher fuel costs. The primary mechanism is our surcharge program. This remains an effective way to mitigate the impact of fuel expense increases.

As we announced last quarter, in addition to costless collars, we entered into a fuel swap covering approximately 15% of our estimated fuel use for fiscal 2027. During the quarter, we elected to apply hedge accounting to both our fuel collar and swap contracts. The result was a partial offset on the operating income line of the higher fuel expense. This benefit helped offset some of the higher diesel prices experienced throughout the quarter. As a result, for the first quarter, after netting out the benefits of surcharges and our hedges, the net impact from higher diesel expense was approximately $16 million, in line with the estimate we provided last quarter.

We continue to watch the fuel volatility closely, but continue to feel confident that the actions we have taken will allow us to navigate through the uncertainty and remain on track to achieve our 2027 guidance, building upon our strong profit results in the first quarter. In the first quarter of 2027, PFG reported net income of $129.5 million, a 38.4% increase year-over-year. Adjusted EBITDA increased 10% to $528 million, which was at the upper end of the guidance range we provided in August. Diluted earnings per share in the first fiscal quarter was $0.82, while adjusted diluted earnings per share was $1.32, an increase of 11.9% year-over-year.

Our effective tax rate was 25.2% in the first quarter, an increase from 23% in the first quarter of last year. We now expect our full year 2027 tax rate to be close to our historical rate of approximately 27%. Turning to our financial position and cash flow performance. During the first quarter, PFG used $89.3 million of operating cash flow, an improvement from the first quarter of 2026, which used $145.2 million of operating cash flow. We invested $53.9 million in capital expenditures during the quarter. We have been diligent around new capital projects and continue to expect full year 2027 CapEx to remain below our long-term target of 70 basis points of net revenue.

As we highlighted last quarter, it is typical for the first quarter of our fiscal year to be a use of cash flow as we build inventory early in the year. We anticipate another year of strong operating and free cash flow over the course of the full fiscal year. We closed the quarter with net debt at the top end of our 2.5x to 3.5x leverage target range, and we expect this to move lower within the range through fiscal 2027 as we prioritize debt reduction and see positive cash flow. The M&A pipeline remains robust, and we continue to evaluate strategic M&A.

We will continue to apply our typical high standards and robust due diligence to evaluate high-quality acquisition opportunities. Turning to our guidance. For the second quarter of 2027, we expect net sales to be in a range of $17 billion-$17.2 billion and adjusted EBITDA to be in a range of $490 million-$510 million. We continue to expect our quarterly EBITDA growth to accelerate as we move through the fiscal year. We are reiterating our expectations for the full fiscal year. Our sales target for 2027 is a range of $72.5 billion-$73 billion, and we continue to expect full year adjusted EBITDA in the range of $2.125 billion-$2.225 billion.

Our full year guidance range includes the benefit of a 53rd week, which will occur in the fiscal fourth quarter and help results by approximately 2%. The midpoint of these ranges represent year-over-year growth of 7.2% for sales and 12.7% for adjusted EBITDA. This keeps us on track to achieve the three-year projections we announced at Investor Day, with sales in a range of $73 billion-$75 billion and adjusted EBITDA between $2.3 billion and $2.5 billion in fiscal 2028. To summarize, we are very pleased with our progress.

We are in a solid financial position, which supports our growth investments and capital return to our shareholders, and our execution in the first quarter sets the stage for a strong fiscal 2027. Thank you for your time today. We appreciate your interest in Performance Food Group. Scott and I would be happy to take your questions.

Operator: Thank you. If you would like to ask a question, press star one on your keypad. To leave the queue at any time, press star two. Once again, that is star one to ask a question. In the interest of time, we ask that you please limit your questions to one question and one follow-up. We will pause for just a moment to allow everyone a chance to join the queue. We will take our first question from Mark Carden with UBS. Please go ahead.

Mark Carden: Good morning. Thanks so much for taking the questions. To start, I was wondering if you could walk through the cadence of your organic independent sales growth or case growth throughout the period. Just within that, are you guys seeing any differences in performance by geography or between customers that might skew towards a higher income customer base versus those that have more of a lower income one? Just any differences you are seeing across the spectrum there. Thank you.

Scott McPherson: Yeah, appreciate the question, Mark. Walking through the cadence of our independent case growth for the quarter, really fairly consistent through the quarter, just a little bit as we exited the quarter, and we have seen that be fairly consistent as we work through the first handful of weeks of Q2. I feel really good about how our sales organization is performing, continue to drive that performance with net new account wins and penetration. Taking a step back and looking at the consumer, looking at the chain consumer, I would say, to your point, the lower end consumer, the QSR space, we have seen more pressure in for sure.

The casual dining space seems to be performing a little well, which points to a little more affluent consumer. That has been, I would say, fairly consistent with what we have seen over the last few quarters. As far as geographical, I would say for us, the West continues to perform exceptionally well, but we are obviously underdeveloped in the West. Outside of that, I called out the Midwest in the past. Midwest is, I would say, a little more in line with what we have seen across the country, and maybe the Southeast a little bit soft, but overall, a little better balance in the quarter.

Mark Carden: Great. As a follow-up, what are you hearing from your Convenience customers on any shifts in demand patterns, just with fuel prices remaining elevated? Are higher prices keeping customers from purchasing as much? Are you seeing a tailwind for more shots on goal? You alluded to your cross-selling differentiation. Just any updates on what you are seeing on that front from a demand perspective?

Scott McPherson: Yeah, it is a great question. Certainly fuel price, when you get to this level of fuel price, it puts pressure on the consumer, not just in Convenience, but across all the food away from home space. I think our Convenience segment has done an incredible job, really focused on Foodservice. You were talking about the cross-sell. Our Foodservice continues to grow in that mid to high single digit, especially in places where we have branded concepts. We called out in the script that those branded concepts are growing at double digit. I think overall, the segment is performing well. Certainly, fuel price puts pressure on the in-store sales piece.

You have seen that in some of the other chains that report publicly. The segment has done really well gaining share, gaining penetration in the stores. But it is certainly a challenging macro.

Mark Carden: Thanks so much. Good luck, guys.

Scott McPherson: Thank you.

Operator: Thank you. We'll move next to Edward Kelly with Wells Fargo. Please go ahead.

Edward Kelly: Hi. Good morning, guys. I wanted to ask you about Q2. Second quarter, it's kind of hard to tell because the business has moved around a bit over the last couple years. I think seasonally, Q2 is usually a stronger quarter than Q1. Has that changed? Maybe, Patrick, could you just sort of unpack the Q2 guide a little bit more as it relates to that? You do have this step down in sales growth that sort of steps back up into the back half. Could you talk about that as well?

Patrick Hatcher: Yeah, Ed, thanks for the question. As we look at exiting Q1, obviously, we talked about in the script some of the really nice improvements or tailwinds. We saw really strong revenue growth across all three segments. The procurement initiative is working well. There were some headwinds that we talked about. First and foremost is the fuel. As we look at Q2, those headwinds persist. We are going to have fuel. We expect it to be very similar to the Q1 impact in Q2. We also expect that we will have, Scott mentioned these inventory comps from last year for Specialty and Convenience will also be a bit of a headwind in Q2.

Then finally, just the compression of inflation for Foodservice. We look at a 4% sales, and I will touch on that question here in a second, but then 10.8% EBITDA growth is actually an acceleration. Q1 and Q2 are fairly similar now just because of the mix of business has changed a little bit. Finally, on your question on the sales growth in Q2, that dips down a little bit, mainly just, or almost primarily because of we are comping over the two customer wins from Convenience, the Love's, which we comped over at the end of Q1, and we will comp over RaceTrac at the end of Q2.

Edward Kelly: Then that back half step up again, I guess that is Jersey Mike's?

Patrick Hatcher: It is definitely Jersey Mike's, and then also just the great performance by the sales organization and confidence in our ability to continue to get new customers, both independent and chain, across all three segments.

Edward Kelly: And just a quick follow-up now. On Specialty, Patrick, just maybe talk a little bit more about Specialty and the outlook as you get into the back half of the year and sort of returning to a normal algo in that business and what that algo looks like.

Scott McPherson: Yeah, no, it's a great question. As Patrick just mentioned, from a top line standpoint, I think we're in our fourth consecutive quarter of sales momentum growth for Specialty. And that's coming off of a year that sales was, top line was really challenging. So, really happy with the organization and their top line performance. They're up against a couple of headwinds that will persist in the first quarter and second quarter, and we talked about that in Q4. One of those is the inventory holding gains, significant candy inventory holding gain that impacted Convenience and Specialty. The other one is obviously fuel price, and they, like everybody, have a fuel price headwind.

They also, in their e-commerce platform, obviously are subject to third-party shipping as well. So, that's kind of a double impact on fuel. Then lastly, on a good note, we had a lot of renegotiation last year, and we renegotiated a significant portion of our customer base. And most of those are long-term, three-to-five-year agreements. So, super positive there. The challenge is in the short run, that puts a little bit of pressure on margin. So, from a cadence standpoint, I would expect a similar performance in Q2, and then we see a really nice rebound in Q3 and Q4 for Specialty as they lap inventory headwinds, they lap some of the fuel headwinds as well.

Edward Kelly: Thanks, guys.

Operator: Thank you. We will move next to John Heinbockel with Guggenheim. Please go ahead.

John Heinbockel: Scott, I wanted to start with composition of local case growth. Of the 5% net new accounts, has there been much change in gross versus loss rate? Then I guess lines per account would be up, what, one and a half or two, then you are losing traffic. Is that fair? Where do you think the biggest opportunity is here to move any of those needles in the next six months or so?

Scott McPherson: Yeah, they are all good questions. First, maybe just to take a step back, we came in at 5.5% for the quarter, so independent case growth. That stepped up a little bit over the course of the quarter. Most of that, as you said, was driven by net new accounts. So, we came in just a tick below 5% on net new accounts. The balance was, as you said, made up all of really lines per drop. So that is really share of wallet penetration in the accounts, and I would really credit that to our sales organization and the technology that we put in front of them and our customers. I think this has really helped penetration.

As I look forward, certainly as you look back at last year, we had quarters that were in the low 5%s and quarters as high as 6.5%. We have a little easier comp in the back half of this quarter and feel like we have great momentum with the sales organization. We have been hiring at about 5% increase. This quarter was actually a little higher than that, so mid-single digit or slightly above in the quarter. Honestly, John, feel really good about the setup. It is a challenging macro, but we keep driving net new accounts and driving penetration and happy with the organization.

John Heinbockel: Then the follow-up would be, where are we now with, because it's been two years, the integration and realization of the Cheney opportunity. Because I think a year ago, about now, some of the CapEx investments began to hit. So where are we with that Performance Brands penetration and then kind of ramping up of synergy between now and the end of the year?

Scott McPherson: Yeah, great question. As we've talked about, Cheney will be a build story throughout this year. They performed well in the quarter, and I would say in line with expectations and really good momentum. As far as brands, I think when we talked about our new kind of brand benchmark at 50%, we were a little bit sub 50% a year ago when we, or a little over a year ago when we bought Cheney. We're now up to 51%, and a lot of growth is starting to come from Cheney. So we're starting to have positive momentum in the brands integration.

Then I would say just overall procurement alignment, I would say alignment of our operations groups, really starting to hit our stride there. Then really where you see great benefit, John, is the infrastructure that we got with Cheney is incredibly helpful as we roll on Jersey Mike's. So being able to flow that volume into that infrastructure provides a nice tailwind for us in the back half of the year.

John Heinbockel: Thank you.

Scott McPherson: Thank you.

Operator: Thank you. We will move next to Kelly Bania with BMO Capital. Please go ahead.

Kelly Bania: Good morning. Thanks for taking our questions. Wanted to ask about just the AI tools across the workforce and any more details you can share on that. Specifically, do those tools change the way that you think about your pace of hiring and growing the sales force, or better said, maybe what you're hearing from your local market leaders and how about hiring and continue to build that platform of growth of the sales force?

Scott McPherson: No, appreciate the question, Kelly. That tool over the last 12 months has gone through a great evolution. We have a sales council that really helps us design that CustomerFirst tool, and it's been a big advantage for us. I think it's really helped penetration. I think it's also a great tool for our customers. At the end of the day, though, what we have found through a lot of research and a lot of analyzation of data is that combination of having a customer on that digital tool, on our sales tool, along with our rep being in that store, working collaboratively with the restaurant owner, that's where we win.

Converting them all over to a digital tool or maintaining 100% relationship with a rep with no digital tool, that's not the sweet spot. We feel like we've kind of hit our stride there. I think that still supports our continued rate in hiring in the mid-single digit range. We feel like that's a good combination, and that tool's going to continue to evolve, and we'll see where that takes us. But right now, I think we're in a good spot.

Kelly Bania: Thanks. Scott, to follow up on that, you did mention kind of the third consecutive quarter of lines per drop. How much would you attribute to those tools? Any specific categories that you are winning there, and who do you estimate you're kind of displacing from a competitive standpoint with those lines per drop?

Scott McPherson: Yeah, it's a really good question, Kelly. We dig into that quite a bit. Are the tools helping? Yes. I would say that where we have proof of that is those tools are making recommendations to our sales reps, to our customers, about things they've forgotten, things they might want to consider, options for limited time offers, and we're getting conversion on a number of those items. Certainly, it's helping the penetration, but still, I stand behind our sales organization. At the end of the day, it's their connection with the customer that really drives all of that. But it is certainly contributing, for sure.

Kelly Bania: Thank you.

Operator: Thank you. We will move next to Alex Slagle with Jefferies. Please go ahead.

Alex Slagle: Thanks. I wanted to dig in a little more on Foodservice and high level. I mean, it was like record Q1 EBITDA margin. The gross profit growth was really strong, so really impressive. I guess it is on the sustainability of this, and if there are any one-time items in there we should consider as we model out the rest of the year. Just the backdrop that it was not that easy overall, whether it is the lower inflation, things like that. I mean, it seems like it was continued mix and procurement and the brands, everything kind of working. Was there anything else in there that we should consider?

Scott McPherson: Yeah, it is a really good question. I will touch on just a couple of the high points, and I will let Patrick fill in the blanks. As you mentioned, really excited about the ability to continue to grow top line in Foodservice, continue to grow independent cases. Our independent percentage of sales was up to 43%. That is the highest we have been. So, really nice to see independent continue to grow. So that certainly helps margins. The brands, brand sales continue to grow as well. Really nice contribution there, and our vendor procurement initiative as well is still a building story. Overall, I would say, really good balance in how we are growing the margins.

Anything you want to add, Patrick?

Patrick Hatcher: Well, just that, yeah, we are really pleased with the performance in Q1. Again, it is everything Scott just mentioned, a lot of things you touched on. But really, that expansion of gross profit margin is really related to the mix and the brands and the independent case growth and the vendor initiatives. So, we expect that to continue throughout the balance of the year.

Alex Slagle: Got it. And the Foodservice inflation, I guess early into fiscal 2Q, how is that looking? Is that still sort of the 0.5 level that you saw in the quarter?

Patrick Hatcher: Yeah, it is a great question. So we did see, as we mentioned throughout the quarter, we saw that deceleration. And really, it is mostly a compression of beef prices going lower, still inflationary, but lower in inflation. We actually saw a little bit of improvement in poultry in October. So, it is still hovering in that low single-digit range.

Alex Slagle: Okay. Thanks.

Operator: Thank you. We will move next to Lauren Silberman with Deutsche Bank. Please go ahead.

Lauren Silberman: Thanks, and congrats on a nice quarter. Fiscal Q1 EBITDA came in at the high end of the guide despite the step-up in fuel and step-down in inflation. Are there any areas where you saw upside to still hit the high end of the guide. As we think Q2, I guess, what gets you to low end versus high end?

Patrick Hatcher: Yeah, thanks, Lauren. So, again, really pleased with how Q1 came in. Obviously, certainly had some pressures during the quarter, as we've already discussed, like fuel. To be honest, the hedges helped, but the hedges just helped offset the higher expense of fuel than what we were expecting as we went into the quarter. So, that really was kind of a net wash. But we do expect that to be the case for Q2 as well, is that we're anticipating fuel to stay at this higher level. So the hedges will help again, but we do expect fuel impact to Q2 to be very similar to Q1.

As we look at the Q2 guide and the low end and the high end, we really anchor to what is the current environment, and that's kind of what drives the midpoint of the guidance. That's how we've always looked at it. We come up with, obviously, various scenarios that would push us to the higher end or lower end. I mean, again, if we continue to see a very similar environment, that's what gets us to the guidance that we gave. If things start to improve, perhaps we could get to the upper end of the guidance. Again, it's impossible for us to know what's going to happen with fuel, and obviously, foot traffic as well.

Lauren Silberman: Okay. I wanted to follow up on the organic independent case growth. There's been some noise in the restaurant industry in October, in particular. Some industry commentary that maybe the month started slow and picked up in the back half of the year. It sounds like maybe you haven't seen that, and the quarter has actually started slightly higher than Q1. I just want to confirm that's the case, and that compares ease, so perhaps there could be a quarter-over-quarter acceleration?

Scott McPherson: Yeah, it's a good question. We did see a slow first couple of weeks. It's gotten better in the last two or three. When I look at quarter to date versus last quarter, there's been a slight acceleration. The comps in the back half are slightly easier. Yeah, we are running just slightly ahead of where we exited the quarter.

Lauren Silberman: Any thoughts as to what's going on in the industry? Perhaps it's just fuel costs, other noise going on, or anything else that you're seeing?

Scott McPherson: Yeah, I think, if you think about the consumer, taking a step back a number of quarters, consumers faced tariff impacts, they've faced inflation, now they're facing drastic fuel price inflation. The one thing I would say is that the consumer overall has been pretty durable. I mean, we've seen foot traffic be negative, but it's been pretty consistent over a number of quarters now. We've seen a little change in the chain space where there's been a little bit of a trend to move towards the higher end, so call it the casual dine versus the QSR space. The independent consumer, I'd say, has just continued to be I mean, the independent customers continue to be resilient.

I'd say, it's been fairly consistent. Certainly a challenging macro and a challenged consumer, but also a pretty resilient consumer.

Lauren Silberman: Thank you very much.

Scott McPherson: Thank you.

Operator: Thank you. We will move next to Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour: Yeah, thanks. Good morning, guys. I guess just when I think about, obviously food inflation, deflation kind of gets passed through, but I know that a year ago, there were some brief challenges when certain products moved very quickly. Did you have any issues with that in the most recent quarter? You felt like the price swings are pretty manageable at this point as you think about kind of passing that through to customers?

Patrick Hatcher: Yeah, Brian, it is a great question. As you point out, we have called that out in the past. In the current environment, it is not that situation really. The deflation that we are seeing in poultry and cheese has been very consistently deflationary. As I mentioned, poultry just actually more recently has started to improve a little, but still deflationary, but less deflationary. Beef has really been just ticking down where it was double-digit inflationary, and that has compressed. Again, this is something we highlighted back in August, and as we saw the quarter progress, it progressed relatively as we expected.

We have embedded this into our guidance to be at this low single-digit inflation, and it is something that we view as very manageable. We manage a very large basket of goods, and so this is, I would say, something that we can manage very well.

Brian Harbour: Got it. Yeah, makes sense. You talked about kind of convenience, the convenience channel through the year. You think it kind of returns to like low single-digit top-line growth as you lap the business wins. I mean, what's your confidence in that? Do you sort of have good visibility on the pipeline through the balance of the year? Does that require macro stability? Does it require a little bit of improvement? Maybe just talk about the ongoing both top and bottom line growth rates in that segment.

Scott McPherson: Yeah, I think we have good line of sight to our pipeline. I mean, certainly we lap a couple of big customer wins, so being mid-single-digit growth is not in the cards without big pipeline wins like that. But we feel like we have a good pipeline. We've got a good focus on the independent and kind of regional chain business in that segment, and certainly see opportunity there. Continuing to grow Foodservice is a big help for us, as well as what continues to go on in the alternative nicotine space. So, both of those things kind of help our growth, help our margins. So, I feel confident in both the top line and bottom line performance.

And you can look back a number of years now, and the Convenience segment has outperformed the market, both on the top and bottom line. That's what gives me a lot of confidence.

Operator: Thank you. We'll move next to Andrew Charles with TD Cowen. Please go ahead.

Andrew Charles: Great, thanks. You talked about procurement savings are going to be spread somewhat evenly between 2027 and 2028. Just trying to think of it from a sequential perspective through the year on a quarterly basis. What did you guys realize in the first quarter, and what is implied in the second quarter just to EBITDA?

Patrick Hatcher: Yeah. Thank you, Andrew. As we mentioned in the comments, really 2026 became a foundational year, but sets us up really nicely for 2027. We are going to see a nice progression of these savings Q1 through this year, and then we expect that the savings in 2027 will be very similar to the total savings that we will see in 2028. We are not really giving quarterly impacts, but just know that they are going to ramp up throughout 2027.

Andrew Charles: Okay. As we think about kind of the balance of the fiscal year, should the incremental EBITDA growth be driven more by continued gross margin expansion or by operating expense leverage? I guess what I am looking to learn is what needs to improve for SG&A growth to be more below gross profit growth on a sustained basis?

Patrick Hatcher: Well, I would just highlight, as we get into Q3 and Q4, we are going to start comping over the fuel expense that started in March and then all through Q4, so we will have some benefits there. That will give us some year-over-year tailwind. We also will have some benefit of comping over some of the Cheney expenses that we experienced during those quarters last year. But largely, it will be some gross profit expansion related to mix, related to all the things that we always are focused on, independent case growth, Performance Brands, Foodservice into Convenience, and the procurement savings, as well as some of those easing comparisons as we go throughout the year.

Andrew Charles: Great. Thank you.

Patrick Hatcher: Thank you.

Operator: Thank you. We will move next to Danny Gargiulo with Bernstein. Please go ahead.

Danny Gargiulo: Great. First of all, I would like to understand or get more color on the inflation evolution, and specifically to what extent was inflation in the past couple of years driven by the spike in beef? Is it a risk that we are going to get into deflationary levels, say in calendar 2027, as the beef supply starts to kick in and perhaps the demand starts to normalize the beef prices? Is there a risk that essentially the deflation on beef coupled with deflation on chicken and dairy could result into overall deflation for you? If so, how would you manage that?

Patrick Hatcher: Well, again, we can manage a very large basket of commodities, and as we've mentioned, cheese and poultry have been deflationary for quite a few quarters. The thing that was propping us up a little bit was that really high inflation in beef. We focus on these three commodities, but there's actually dozens and dozens of commodities that make up this basket. So beef has come down, and that's compressed the overall inflation number to this low single digit or slightly below low single, 0.5% is what we reported. If it continues to move down and we dip into slight deflationary, that is manageable. As I mentioned, most recently, we've seen poultry improve, still deflationary, but made a nice improvement.

So again, as long as the movements aren't steep up or down, we can manage this commodity of basket, or this basket of commodities, sorry.

Danny Gargiulo: Great. Thank you. The follow-up is, it's a bit more strategic in nature. The pressures that we are seeing among independent food distributors seems to be quite elevated right now, right? You have the diesel cost going up. At the same time, we've been talking about the truck driver availability in the industry coming down. So, there is an opportunity for your U.S. scale to be potentially gaining more market share in this time.

I was wondering if you are or you could be using price as an incremental lever a little bit more aggressively to gain volume to be offsetting some of the lower inflation rate, and maybe achieve some of these outside market share gains to gain some captive customer base. Thank you.

Scott McPherson: No, I completely understand the question. I think we're an organization that focuses on the value we bring to our customer. Price is certainly a component of that value, but I think that if you talk to our salespeople, they lead with the fact that we have incredible brands and that we can bring unique value to them beyond price, with the products we're able to sell them, the marketing that we do around our goods, their knowledge as sales reps to help a restaurateur navigate menu and pricing and limited time offers. Certainly we are large enough to compete on price, but I think if everybody was trying to do that, you'd have a race to the bottom.

I think we've got rational competitors, and we feel like we bring different value to the customer, and so that's the last place we go. I do think that we have our investment in the sales organization and the value we bring to customers, I think we have the ability to continue to grow share, and we've done that very consistently.

Danny Gargiulo: Thank you.

Scott McPherson: Thank you.

Operator: Thank you. We'll move next to Jacob Aiken-Phillips with Melius Research. Please go ahead.

Jacob Aiken-Phillips: Hey, good morning, everyone, and good quarter. I wanted to ask on the procurement execution, just beyond the timings of the savings, how much of the remaining procurement opportunity comes from better terms on products you already buy versus changing purchasing behavior across the OpCos, and where's the biggest execution opportunity still ahead?

Patrick Hatcher: Well, I do not want to get too much in the weeds, but it is actually, we view our strategic vendors as great partners, and we work very closely with them. Our goal is to really talk to them about our scale and the opportunities that we continue to present to them as new opportunities to sell. Largely speaking, we tend to stay with the same suppliers, but in some cases, there have been opportunities for us to switch suppliers.

Scott McPherson: Yeah, the other thing I would add to that is, the great thing about this initiative for us has been really just kind of a reframing of how we approach our vendors and how we think about that negotiation, not just on cost of goods, but how we look at the supply chain, how we move freight. I think it is a foundation that we can use in Foodservice. We can use it in Convenience and Specialty as well. It is something that will, I think, go far beyond kind of our two-year, three-year outlook. I think this is a great foundational approach to how we negotiate and partner with vendors.

Jacob Aiken-Phillips: On the Specialty contract, the customer agreements you recently renewed, what allows you to improve profitability over their three-to-five-year lives? Are there volume commitments, pricing provisions, or other opportunities to lower the cost to serve that makes them more attractive?

Scott McPherson: Yeah, it is a really good question. I am glad you asked because, really with the ones that we have re-signed and partnered with, they are all growing concepts, and growing customers for us. Really just adding that volume to existing deliveries and to our infrastructure is really what allows us to start to drop profit to the bottom line. That is why we sign long-term agreements with these folks, and a lot of them have been long-term partners as well. Really, I think the Specialty group did a great job of just solidifying those partnerships and feel a lot of confidence over the term of those agreements that we will continue to get more profitable.

Jacob Aiken-Phillips: Thank you.

Operator: Thank you. We will move next to Karen Holthouse with Citi. Please go ahead.

Karen Holthouse: Hi. Thank you for taking the question. I wanted to go back to the operating expense line. The message I think I got last quarter was that you expected that line would still see some pressure in the second quarter and then start to see leverage in the back half of the year. Knowing what you know now, fuel is obviously a little bit more of a headwind. Is that still the anchor, that 1Q, 2Q inflection? Is that still what we should be anchoring, or 1H, 2H inflection? Is that what we still should be anchoring to?

Patrick Hatcher: Yeah, that is right, Karen. Exactly. Q1, we saw the $16 million headwind for fuel. We are expecting a very similar headwind in Q2 based on current prices. Then as we get into the second half, we are still anticipating higher fuel, but we will obviously, once we get to March, start comping over the higher fuel from last year. So that is where things ease a little bit, and then throughout Q4.

Karen Holthouse: Can you give us what organic and total chain case growth was for the quarter?

Scott McPherson: Let's see here. Well, I know that chain case growth was just slightly negative in the quarter, which is, I think for us, a great result considering that foot traffic trends continue to be down a couple of percentage points. Really, organic and total were about the same, because we didn't really have any major market share wins that impacted the quarter.

Karen Holthouse: Okay, great. Thank you.

Operator: Thank you. Once again, if you would like to ask a question, please press the star and one on your telephone keypad now. We will take our next question from Peter Saleh with BTIG. Please go ahead.

Peter Saleh: Great. Thanks for taking the question. I apologize if this was asked, but on the sales force expansion, can you just update us on where you are there, how that expanded this quarter? Maybe more specifically, what are you seeing on hiring trends? Is it becoming more difficult to find the right people, easier? Any detail on that front would be helpful. Then I have a follow-up. Thanks.

Scott McPherson: Yeah, absolutely. I think now for three or four quarters, I've said that we've been hiring in the mid-single-digit range. This quarter was no different. To be a little more specific, we were slightly above the midpoint of that, so slightly above 5% in the quarter. So a little higher this quarter. But I would say availability has been fairly consistent. I think we've got a reputation of being a great place to work and a great place to build your career, so we're finding available talent that's making great contributions.

Peter Saleh: Thank you for that. Then on the-just curious if you could talk a little bit about what cuisines you're seeing strength and where you may be seeing weakness. Anything regionally as well would be helpful. Thanks.

Scott McPherson: I would say cuisine-wise for us, we've certainly seen probably the most strength in our Latin and Hispanic, certainly also in our Asian. We've done really well in the Convenience segment of Foodservice. A lot of that, and the other one I call out is bar and grill. The interesting thing in bar and grill and Convenience, a lot of the growth is coming from pizza and Italian. It's primarily pizza. So we're doing really well with pizza into some of those segments. But those are kind of the outliers that are performing well.

Then I would say regionally, I mentioned earlier, a little more balance in this quarter regionally, maybe a little softer in the Southeast, but the Midwest has perked up a little bit, and we continue to grow very well in the West.

Peter Saleh: Thank you.

Scott McPherson: Thank you.

Operator: Thank you. There are no further questions in queue at this time. I will now turn the meeting back to Bill Marshall for his closing remarks.

Bill Marshall: Thank you for joining our call today. If you have any follow-up questions, please reach out to us in Investor Relations.

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