Performance Food Group (PFGC) CEO George Holm on Q2 2019 Results - Earnings Call Transcript

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About: Performance Food Group (PFGC)
by: SA Transcripts
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Earning Call Audio

Performance Food Group (NYSE:PFGC) Q2 2019 Earnings Conference Call February 6, 2019 9:00 AM ET

Company Participants

Michael Neese - Vice President, Investor Relations

George Holm - Chief Executive Officer

Jim Hope - Chief Financial Officer

Conference Call Participants

Edward Kelly - Wells Fargo

Karen Short - Barclays

Christopher Mandeville - Jefferies

Fred Wightman - Citi

John Heinbockel - Guggenheim Securities

Judah Frommer - Credit Suisse.

Vincent Sinisi - Morgan Stanley

Kelly Bania - BMO Capital

Andrew Wolf - Loop Capital Markets

Bryan Hunt - Wells Fargo Securities

Bob Summers - Buckingham

Operator

Good day, and welcome to the PFG Fiscal Year 2019 Q2 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by PFG's management and the question-and-answer session.

I would now like to turn the call over to Michael Neese, Vice President, Investor Relations, for PFG. Please go ahead, sir.

Michael Neese

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

We issued a press release regarding our 2019 fiscal second quarter results this morning. The results discussed in this call will include GAAP and non-GAAP results adjusted for certain items. A 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 and projections of future results. Please review the cautionary forward-looking statements section in today's earnings release and our SEC filings for various factors that could cause our actual results to differ materially from forward-looking statements and projections.

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

George Holm

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

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

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

The increase in total sales volume was also partially attributable to slight same-store sales growth in the company's casual dining segment. We continue to make investments in technology and our digital ordering platform. Approximately one out of every five independent orders are placed on our technology platform today. We are also making investments in our customer-facing tools including continued enhancements to our MarketWatch platform.

Vistar delivered another quarter of strong top and bottom line results. Net sales increased 12%, and as I mentioned EBITDA grew by more than 30%. The top line increase was driven by broad-based case growth across all of our channels, most notably in our theater retail, wending channels led by micro kitchen and micro markets.

As you may recall, Vistar has now lapped our CCSI expenses from an acquisition last year and we expect continued tailwinds throughout the fiscal year. I believe our Foodservice segment is making good progress. We still face some headwinds specifically related to where we made investments in people. We continue to see a higher labor cost where we did make these investments, but we're moving in the right direction. The investments are paying dividends and we feel we are headed in the right direction. Craig Hoskins, Jim Hope and the team are focused on leveraging for operating expenses.

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

Overall independents are doing well and we feel we are gaining share. We are seeing several changes in casual dinings post same-store sales growth most likely driven by their promotional activities. In summary, we're on track to deliver another year of strong growth. We plan to deliver against our strategic priorities and return value to our shareholders. Vistar is exceeding our expectations and they are executing their growth plans.

The Foodservice segment is making good progress and their strategic investments are on schedule and will pay off later this year. We expect to continue to see sequential improvement in that part of our business. This quarter, we'd like to highlight an associate who fully embodies PFG's dedication to service. Charlie Lee is with PFG's Performance Foodservice Carroll location in Louisiana. He joined the company as a driver in 1969 and has been providing exceptional service to PFG customers ever since.

During Charlie's 50-year career, he has served as a role model and mentor for not just our drivers, but all of our associates through his reliability and business attitude and thoughtfulness. His customers have always been his top priority. One restaurant manager said, he is very respectful, professional, patient, and always takes time to help us whenever we're busy. I want to thank Charlie who is also a Vietnam War Air veteran for his service for our country and his steadfast dedication to this company for half a century. Charlie despite being in his 70s continues to deliver as a driver five days a week and volunteers to work half-day on Saturday as a helper.

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

Jim Hope

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

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

Overall food cost inflation was approximately 1.2% in our second quarter. We experienced inflation in frozen foods, meats, produce and seafood. And some categories were deflationary such as cheese, poultry and eggs. Given what we are seeing today, we expect inflation to increase approximately 1% to 2% this calendar year.

Gross profit for the second quarter grew 8.3% to $614.6 million. A 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 13.3%.

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

Our OpEx control was improving sequentially from our fiscal fourth quarter of 2018, but we have more work to do in this area. Net income for the second quarter of fiscal 2019 declined 44.7% year-over-year to $43.1 million. The decline was primarily a result of a $57.1 million increase in income tax expense, partially offset by the $23.9 million increase in operating profit.

The increase in income tax expense was primarily a result of the prior year impact of the Tax Cuts and Jobs Act and the prior year excess tax benefit associated with the performance vesting of certain stock-based compensation awards. The effective tax rate in the second quarter of fiscal 2019 was approximately 23.4% and we expect our full year effective tax rate for fiscal 2019 to be approximately 26%.

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

Turning to cash flow. In the first six months of fiscal 2019, PFG generated $70 million in cash flow from operating activities, an increase of $37.4 million versus the prior year period. The improvement in cash flow from operating activities was largely driven by lower income taxes paid and improvements in working capital. For the first six months of fiscal 2019, net sales growth was driven by and increase in cases sold, including independent case growth of 4.3% and solid independent customer demand for Performance Brands. This increase in net sales was also attributable to an increase in selling price per case as a result of inflation.

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

Second quarter EBITDA for Foodservice increased 2.2% to $104.3 million, compared to the prior year period. Gross profit increased 5.3% in the second quarter of fiscal 2019, compared to the prior year period as a result of an increase in cases sold as well as an increase in gross profit per case. The increase in gross profit per case was driven by a favorable shift in the mix of cases sold including more Performance Brands' products sold to our independent customers.

The second quarter EBITDA was impacted by higher operating expenses driven largely by the prior year's strategic investments in sales, warehouse and delivery associates and higher fuel price.

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

Gross profit dollar growth of 19.4% for the second quarter of fiscal 2019 compared to the prior year period was fueled by an increase in the number of cases sold. Operating expense dollar growth of 13.8% for the second quarter of fiscal 2019 was primarily the result of higher variable operating costs associated with the higher case volume. The CCSI integration continued to show good improvements and we're realizing solid synergies from the transaction.

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

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

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

George Holm

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

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Edward Kelly of Wells Fargo.

Edward Kelly

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

George Holm

Yes. We believe that we will improve as the year moves along. We've people coming off non-competes, we feel like we've made some pretty good investments in people. We had an exceptional January as far as independent growth goals. Now we also feel that we probably had I guess more difficult weather last year than we had this year.

So we're at this point trying not to get too excited about the first six weeks. But so far so good. And we feel like -- sometime between now and the end of this fiscal year, we're hopeful to get back in that 6% to 10% range that we've been doing for about a decade.

Edward Kelly

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

Jim Hope

Yes. Thanks Ed. It's Jim. Look, I believe our Foodservice segment is making good progress, we're encouraged. They still face some headwinds, specifically related to higher labor, but they're moving in the right direction. Craig Hoskins and his team are focused on what matters including leveraging operating expenses.

Weather could always impact us in our fiscal third quarter. But we're watchful and we're realistic when it comes to weather in Q3 results. We've started Q3 back in our independent case range as George mentioned. However, we do believe there was an easy comp due to weather in January 2018 and we all know March makes the quarter. So we have to get through March.

Edward Kelly

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

George Holm

Well, we typically had a higher percentage of our both sales and EBITDA growth come from M&A in Vistar than we have in Foodservice and we actually see that continuing for a period of time. It's hard to say how long, but I think we're probably in a good shape for at least another year.

The business is extremely well managed. We've been added for a long time. I think the business has matured and certainly we have high shares in the channels that we're in. But we also see other channels that we can continue to provide good service in and if it's kind of heavy single serve in the channel, if it's heavy with candy snacks particularly specialty beverage, I guess, the beverage in general, but particularly specialty beverage, we feel we belong in those channels.

So I think that's where our growth is going to come. And it's just a very well-managed business. And as I said, we've done it for a long time and we think we're pretty ingrained.

Edward Kelly

Okay. Thanks, guys.

Operator

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

Karen Short

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

Jim Hope

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

Karen Short

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

George Holm

Yes, I'll do that. Once again I would state that I think we've got some tailwinds in Vistar for a while to come. I also feel that the sequential improvement we're getting in Foodservice that we're going to continue to get. Running 30% EBITDA growth for a long-term period of time is not something we're suggesting would happen in Vistar.

But as we see the continued improvement in Foodservice that has a more significant impact on the total company just because of the sheer size of our Foodservice. So, I think that what Jim stated is very accurate that we're real comfortable in that 7% to 10% range. We have been in that range for a long time. And we're not always going to do it in the same way and we'd love to see Vistar continue that kind of EBITDA growth, but we're not so sure that that's the kind of thing you plan for.

Karen Short

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

George Holm

We've always felt like we're going to put somebody into that position. We just wanted to make sure that we looked at all potential candidates that are internal and external. And in the end, we made the great choice of putting Craig into that position. I think it's going to add a great deal for us because of his background. He's had a very senior role in Vistar, he had a very senior role in Roma, and a very senior role in -- well, he actually was the CEO of Customized for seven years.

So, he has seen the whole company. And I've always been a believer that there's more that we can do as a group than we have done in the past. And he and Pat Hagerty that runs Vistar have worked together for many, many years. They were both at Multifoods Distribution Group when I did the original acquisition which actually goes back to 2002. So, we've got two really experienced people running our two largest businesses and I think we're just in great shape for the future.

Karen Short

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

George Holm

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

Karen Short

Right, yes. Thanks.

Operator

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

Christopher Mandeville

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

George Holm

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

Christopher Mandeville

Correct.

George Holm

We're -- we had a good January.

Christopher Mandeville

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

George Holm

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

Christopher Mandeville

Okay. That makes sense, very prudent. And then maybe just a kind of follow-up on Karen's question to get a sense of segment EBITDA growth, can you help me square some of your comments on being ahead of schedule on Vistar? But then maybe Jim having mentioned that you guys were kind of tracking inline with your plan for the first half.

Just trying to figure out what's going on between the segments here. You also referenced that you're seeing some sequential improvements in PFS, but then maybe also not to expect continued 30% growth on Vistar?

George Holm

Yes. I'll break it into two pieces. Vistar is doing exceptionally well and we don't typically expect the company to deliver those kind of results year-over-year. I mean it's impressive and we're still pleased and encouraged with the work and the results they're delivering.

Performance Foodservice, our Foodservice division is starting to show signs of delivering slightly better results. I made remarks about the specifics there and it's early and we're encouraged there by what they're starting to do.

Christopher Mandeville

Okay. And then just a final house-keeping question, what was the private brand mix and online mix for independents in the quarter?

Michael Neese

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

Christopher Mandeville

No problem Michael. Thanks guys.

Operator

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

Fred Wightman

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

George Holm

Yes, this is George. I mean, we certainly saw improvement. There was lot of promotional activity and it was heavy. And I think we have a tough time commenting on that. First of all, obviously we're not going to comment on any individual customers.

But it was a quarter where in aggregate we saw case growth at the same-store level which we have not seen for a long time. But there were winners and losers and some did better than others. I would say, all in all, we're encouraged, but we just don't know the level that was weather and the level that was just promotional activity.

Fred Wightman

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

George Holm

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

Fred Wightman

Okay. Thanks.

Operator

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

John Heinbockel

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

George Holm

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

John Heinbockel

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

George Holm

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

John Heinbockel

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

Jim Hope

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

John Heinbockel

Okay. Thank you.

Operator

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

Judah Frommer

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

George Holm

This is George. A little over a year ago, as we started to get the projection of what the numbers were going to be like in theater, it became quite evident that with the acquisition that we had made where we were continuing to provide service from the acquisition that we were going to have some capacity issues.

So we moved that business earlier than we had planned to move it, so that we are prepared for Star Wars in December. So we had some expense last year, where we were training in Q2, these employees to get them ready in the Vistar facilities, while we were continuing to pay the same for that business done out of the acquisition buildings. And then we had some severance to deal with.

So I would state -- and these are very hard to figure, but I would say that we probably had a decent amount of expense last year that was non-recurring expense. So as we get to now, we only have one of those facilities left from that acquisition.

So we're operating out of less buildings and we're operating without having an excessive amount of people in training. So, yes, we definitely had easier comparisons in the second quarter of last year in Vistar than we typically would.

Judah Frommer

Okay.

George Holm

We don't have the ability to quantify that, because you're moving so much business around.

Judah Frommer

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

George Holm

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

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

Jim Hope

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

Judah Frommer

Great. Thanks.

Operator

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

Vincent Sinisi

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

George Holm

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

Vincent Sinisi

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

George Holm

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

Vincent Sinisi

Okay. Okay. All right. We’ll look forward to hearing more. Good luck, guys.

George Holm

Thanks, Vincent.

Operator

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

Kelly Bania

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

George Holm

First of all, as far as competition, we play in many different channels. And we have competition in every channel that we are in and some are stronger than others. Some of the areas of business we're in we have significant strong competition. But I just feel that we have such assortment of product, because we do hit so many channels. And when you have distribution centers that have 7,000, 8,000 SKUs and it's in a very narrow product base, I think it makes pretty difficult to deal with. As far as drop size that couldn't vary more than it does. We go everywhere from having a significant amount of business that we deliver on 52-foot trailers and we have a significant amount of business where the orders are small to the extent that we have that delivered to FedEx or UPS.

So it's the whole gamut and that's one of the reasons why you're seeing some fairly heavy increase in expenses and as far as expense ratio and some nice increases in margin as well. Our growth has tended to come from higher margin parts of the business that are also higher cost to serve. And we just want to continue to be able to service a customer all the way from somebody that needs a couple of boxes to somebody that needs a quarter of a truckload.

As far as kind of drop size minimums, we don't really think in those terms. We just want to make sure that we're servicing real well and that the orders are profitable. As far as dollar stores go, it's a very active channel for us today. We have a lot of conversations going on. It's continuing to be a good growth area for us. We have a very large anchor customer, who does a great job and we feel we have a good relationship with. And we just look at it as a channel that we should be able to continue to grow.

Kelly Bania

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

George Holm

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

Kelly Bania

Thank you.

Operator

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

Andrew Wolf

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

George Holm

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

Andrew Wolf

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

George Holm

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

Andrew Wolf

Okay. So, you'd basically -- it helps the mix and, let's say, you can get a better mix and get better unit profitability through pick and pack?

George Holm

Correct. That's correct.

Andrew Wolf

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

George Holm

Well, December was a tough month. Those were very tough comparisons. We are continuing to penetrate these counts a little bit better. Not so much with picking up business that a competitor has but just getting them to add to what their offering is.

And we've got some tough comparisons coming up here in the month of February where last year it was a little bit more vibrant from a product standpoint. But it's just a good channel and we continue to do well with it. We've got good customers and our people are always looking for those opportunities to expand the product offering.

Andrew Wolf

Thanks. And just one question for me on Foodservice and a lot of good questions. Did -- the topline Foodservice accelerated nicely which given the case growth in independents had to have come from the chains. And yet you had it sounds like pretty much on plan in selection and EBITDA.

So, should we take away from that the chains -- chain business that you're adding now is much more profitable than -- or reasonably more profitable than had been in the past either folks you're mixing out or folks you're bringing in?

George Holm

Well, our mix didn't go as much to our benefit as it should. And no piece of chain business ever is at a level of profitability that's going to help your ratio, I guess, of EBITDA to sales.

But within our independent category, we did well with margin and also our average case costs. We did really well in the more expensive case areas. So that also was a big help. So it's more of that then getting the real help -- significant help to the bottom line from chain business.

Andrew Wolf

Okay. Thank you. Appreciate it.

Operator

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

Bryan Hunt

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

George Holm

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

Bryan Hunt

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

George Holm

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

Bryan Hunt

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

George Holm

Thank you. Yeah, look I'd say this; the vast majority of the CapEx is expansions in facilities and then there's certainly a good degree of maintenance capital and technology as well. And those investments go across both, the Foodservice and broadline area as well as Vistar.

And, no, I wouldn't talk about our hurdle rates here. But I would tell you that we do a very disciplined job of studying and quantifying the value we'll get by investing every dollar of shareholders' money.

Bryan Hunt

Thank you.

Operator

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

Bob Summers

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

George Holm

Well, I think that's a hard number for us to come up with. I mean, when you bring people on, you do move a certain amount of business to people to enjoy some success of writing orders, and I think it gets pretty jumbled up. What we have found is that if we hire good people and train them well and give them some business to start and they'll perform well for us. And particularly if they have relationships and they come off of a one-year no compete and they can utilize those relationships they tend to even do a little bit better.

And we talk about our investment; it wasn't just in sales people. There were parts of the country where we made increases in compensation to drivers and to warehouse people where we felt that we needed to do that. And in some of those areas, we've gotten some nice increase in productivity by doing that some we didn't. But that equally is important for us because providing good service today is really harder than it has been in the past. And that's really more of what we were referring to as far as investments that we've made. It's more in investments in warehouse people and drivers.

Q – Bob Summers

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

A – George Holm

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

Q – Bob Summers

Great. Thank you.

Operator

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

Q – Unidentified Analyst

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

A – George Holm

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

Q – Unidentified Analyst

Great. Thank you.

Operator

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

Michael Neese

Thank you for your time today. We look forward to seeing everyone at the Cagney Conference down in Boca. We are going to present at 4 o’ clock on February 19 and we look forward to heading down there. Have a great day. Thank you.

Operator

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