RICHMOND, Va.--(BUSINESS WIRE)--Performance Food Group Company (“PFG”) (NYSE: PFGC) today announced its second-quarter and first-half fiscal 2018 business results.
“We are pleased with our second-quarter results, which were driven by solid independent case growth and double-digit growth in Adjusted EBITDA,” said George Holm, PFG’s President and Chief Executive Officer. “Our results reflect the consistent execution of our team’s strategies across all of our business segments enabling us to grow both market share and margins. Based on our strong first-half results and the U.S. tax reform changes, we are increasing our fiscal 2018 Adjusted EPS outlook and now expect growth of 24% to 30% year-over-year.”
1 This earnings release includes several metrics, including EBITDA, Adjusted EBITDA and Adjusted Diluted Earnings per Share that are not calculated in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”). Please see Statement Regarding Non-GAAP Financial Measures at the end of this release for definitions of such non-GAAP financial measures and reconciliations of such non-GAAP financial measures to their respective most comparable financial measures calculated in accordance with GAAP.
Second-Quarter Fiscal 2018 Financial Summary
Total case volume increased 4.2% in the second quarter of fiscal 2018 compared to the prior year period, with underlying organic growth of 2.0%. Total case volume was driven by a 6.5% increase in independent cases, growth in Performance Brands cases and broad-based growth in Vistar’s sales channels, partially offset by declines in the casual dining segment within Customized.
Net sales for the second quarter of fiscal 2018 increased 6.4% to $4.3 billion versus the comparable prior year period. The increase in net sales was driven by growth in Vistar, particularly in the theater, hospitality, retail and vending channels, case growth in Performance Foodservice, particularly in the independent restaurant channel, and recent acquisitions. Overall food cost inflation was approximately 2.5% in the second quarter.
Gross profit for the second quarter of fiscal 2018 grew 9.7% compared to the prior year period, to $567.6 million. The gross profit increase was led by case growth and from selling an improved mix of customer channels and products, specifically to the independent restaurant channel. Gross margin as a percentage of net sales was up 40 basis points over the prior year period to 13.2%.
Operating expenses grew by 11.3% in the second quarter of fiscal 2018 compared to the prior year period, to $518.5 million. The increase in operating expenses was primarily due to growth in case volume and the resulting impact on variable operational expenses, one-time expenses totaling approximately $18 million, acquisition integration costs within Vistar, as well as an accelerating increase in sales personnel. A significant majority of the one-time costs related to the exit of the Company’s private-equity shareholder during the quarter. Excluding these non-recurring charges, operating expenses would have increased approximately 8.0%.
Due primarily to one-time expenses, EBITDA decreased 0.9% in the second quarter of fiscal 2018 compared to the prior year period to $81.5 million. For the quarter, Adjusted EBITDA increased 12.2% to $105.0 million compared to the prior year period.
Net income for the second quarter of fiscal 2018 grew 240.6% year-over-year to $78.0 million. The net income increase was a result of the $59.2 million decrease in income tax expense. The decrease in income tax expense was primarily driven by the recently enacted Tax Cuts and Jobs Act (the “Act”) and the excess tax benefit of $15.4 million, or $0.14 per share associated with the performance vesting of certain stock-based compensation awards.
Diluted EPS increased 240.9% to $0.75 in the second quarter of fiscal 2018 over the prior year period. The federal tax rate reduction caused PFG to recognize a $37.4 million, or $0.36 per share, one-time non-cash gain in the second quarter, related to the revaluation of its net deferred income tax liability. Adjusted diluted EPS increased 37.9% to $0.40 per share in the second quarter over the prior year period.
First-Half Fiscal 2018 Financial Summary
Total case volume increased 3.9% in the first half of fiscal 2018 compared to the prior year period, with underlying organic growth of 2.1%.
Net sales for the first half of fiscal 2018 was $8.7 billion, an increase of 7.1% versus the comparable prior year period. The increase in net sales was primarily attributable to sales growth in Vistar, particularly in the theater, hospitality, retail, and vending channels, case growth in Performance Foodservice, particularly in the independent restaurant channel, and recent acquisitions.
Gross profit increased 9.1% compared to the prior year period, to $1.1 billion. The gross profit increase in the first half of fiscal 2018 was led by case growth and an improved sales mix of customer channels and products, specifically to the independent restaurant channel. Gross margin as a percentage of net sales was up 20 basis points over the prior year period to 12.9%.
Operating expenses increased 8.2% in the first half of fiscal 2018 compared to the prior year period, to $1.0 billion. The increase was primarily due to case volume growth and the resulting impact on variable operational expenses, one-time costs primarily related to the exit of the Company’s private-equity shareholder and acquisition integration costs within Vistar, partially offset by a decrease in professional, legal and consulting expenses within Corporate.
Operating profit was up 20.1% to $99.6 million driven by strong top-line and gross profit growth and mix of business specifically within the independent restaurant channel. Net income was up 186.6% to $100.6 million for the first half of fiscal 2018 compared to the prior year period. The significant increase in net income was a result of the Company’s strong operating profit performance combined with the $52.9 million decrease in income tax expense due primarily to the Act.
EBITDA increased 13.6% in the first half of fiscal 2018 compared to the prior year period to $163.7 million. For the first half of fiscal 2018, Adjusted EBITDA increased 15.4% to $195.7 million compared to the prior year period.
Diluted EPS increased 182.4% in the first half of fiscal 2018 over the prior year period, to $0.96. Adjusted diluted EPS increased 36.7% in the first half over the prior year period, to $0.67 per share.
Cash Flow and Capital Spending
In the first six months of fiscal 2018, PFG generated $32.6 million in cash flow from operating activities, an increase of $58.1 million versus the prior year period. The improvement in cash flow from operating activities was largely driven by higher operating income and improvements in working capital.
For the first six months of fiscal 2018, the Company invested $38.5 million in capital expenditures. PFG now expects capital expenditures for fiscal 2018 will be between $140 million and $160 million. The fiscal 2018 capital expenditures estimate is lower than the Company’s previously provided estimate due to the timing of projects.
Second-Quarter Fiscal 2018 Segment Results
Performance Foodservice (PFS)
PFS net sales for the second quarter of fiscal 2018 increased 7.5% to $2.5 billion compared to the prior year period. Net sales growth was driven by an increase in cases sold, including 6.5% independent case growth and solid independent customer demand for Performance Brands. For the quarter, independent sales as a percentage of total segment sales was up over 100 basis points to 44.5%.
EBITDA for PFS increased almost 10% to $83.0 million in the second quarter of fiscal 2018 compared to the prior year period. EBITDA growth was driven by a nearly 8% increase in gross profit and strong operating expense control, offset slightly by an increase in fuel expense. The increase in gross profit per case resulted from a favorable shift in the mix of cases sold to independent customers and increased sales of Performance Brands.
Vistar
For the second quarter of fiscal 2018, Vistar net sales grew 13.7% to $838.9 million compared to the prior year period. This increase was driven by strong case sales growth in the segment’s theater, hospitality, retail, and vending channels.
Second-quarter EBITDA for Vistar was up 3.0% versus the prior year to $34.0 million. Gross profit dollar growth of 19.3% for the second quarter was fueled by an increase in the number of cases sold and a favorable change in sales mix. Second quarter EBITDA was impacted by higher variable operating costs associated with higher case volume, integration costs related to recent acquisitions and higher warehouse personnel costs and fuel expense. The Company expects these higher costs to mostly abate throughout the remainder of the fiscal year.
PFG Customized
Net sales for PFG Customized decreased 4.9% to $888.2 million in the second quarter of fiscal 2018 compared to the prior year period. Excluding the impact of the Georgia facility that was closed in the fourth quarter of fiscal 2017, net sales would have been slightly positive in the second quarter of fiscal 2018 compared to the prior year period as a result of a favorable shift in customer mix.
PFG Customized EBITDA decreased 11.9% to $5.9 million in the second quarter of fiscal 2018 compared to the prior year period. The decrease in EBITDA was driven by higher operating expenses, including higher warehouse personnel costs and fuel expense, partially offset by an increase in gross profit, which was primarily the result of a favorable shift in customer mix.
Tax Update
On December 22, 2017, HR1, the Tax Cuts and Jobs Act was enacted. The federal income tax rate for PFG will decrease from the previous 35% rate to a blended 28% rate for fiscal 2018 based on PFG’s fiscal year calendar. This federal rate will decrease in fiscal 2019 and thereafter to 21%. PFG’s effective tax rate from operations is expected to decrease from the previous 40% rate to approximately 33% in the third and fourth quarters of fiscal 2018, and further decline to approximately 27% in fiscal 2019.
The federal rate reduction caused PFG to recognize a $37.4 million one-time non-cash gain in the second quarter, relating to the revaluation of its net deferred income tax liability. There was also a year-to-date true up of tax expense in the second quarter to adjust the federal tax rate booked in the first quarter at 35% down to the 28% blended tax rate applicable to fiscal 2018. This resulted in a non-cash gain of approximately $2.5 million in the second quarter.
For the remainder of fiscal 2018, the Company expects cash tax savings of approximately $15 million to $18 million, driven by the lower federal tax rate and the first-year deduction for machinery and equipment, excluding discreet items.
Fiscal 2018 Outlook
For fiscal 2018, PFG reaffirms its Adjusted EBITDA growth to be in a range of 8% to 11% higher than its fiscal 2017 Adjusted EBITDA of $390.7 million. The Company continues to expect second-half Adjusted EBITDA growth to be in the high single digits. The Company also continues to expect to be at the higher end of the full-year Adjusted EBITDA range. Based on the Company’s strong first-half results and the U.S. tax reform changes, PFG increases its Adjusted Diluted EPS outlook representing growth in a range of 24% to 30% to $1.54 to $1.61 over its fiscal 2017 Adjusted Diluted EPS of $1.24. This compares to the Company’s prior Adjusted Diluted EPS growth of 13% to 18%.
PFG’s Adjusted EBITDA and Adjusted Diluted EPS outlook and full-year forecast for its effective tax rate on operations exclude the impact of certain income and expense items that management believes are not part of underlying operations. These items may include, but are not limited to, loss on early extinguishment of debt, restructuring charges, certain tax items, and charges associated with non-recurring professional and legal fees associated with acquisitions. PFG’s management cannot estimate on a forward-looking basis the impact of these income and expense items on its reported net income, its reported Diluted EPS, and its reported effective tax rate because these items, which could be significant, are difficult to predict and may be highly variable. As a result, PFG does not provide a reconciliation to the closest corresponding GAAP financial measure for its Adjusted EBITDA and Adjusted Diluted EPS outlook or its effective tax rate on operations forecast. Please see the “Forward-Looking Statements” section of this release for a discussion of certain risks to PFG’s outlook.
Conference Call
As previously announced, a conference call with the investment community and news media will be webcast on February 7, 2018 at 9:00 a.m. Eastern Standard Time. Access to the webcast is available at www.pfgc.com.
About Performance Food Group Company
Through its family of leading foodservice distributors – Performance Foodservice, Vistar, and PFG Customized – Performance Food Group Company (PFG) markets and distributes approximately 150,000 food and food-related products from 76 distribution centers to over 150,000 customer locations across the United States. PFG’s 14,000+ associates serve a diverse mix of customers, from independent and chain restaurants to schools, business and industry locations, hospitals, vending distributors, office coffee service distributors, retailers, and theaters. The company sources its products from more than 5,000 suppliers and serves as an important partner to its suppliers by providing them access to the company's broad customer base. For more information, visit www.pfgc.com.
