Good day, and welcome to this PFG Conference Call to discuss its acquisition of Cormark Holding Company. I would now like to turn the call over to Bill Marshall, Vice President, Investor Relations for PFG. Please go ahead, sir.
Thank you, Laurie, and good morning. We appreciate your participation today on such short notice. We're here this morning with George Holm, PFG's CEO and Jim Hope, PFG's CFO, to discuss the proposed transaction to acquire Core Mark. This morning, we issued a press release regarding a proposed transaction. Both the release and presentation materials that accompany this call can be found in the Investor Relations section of our website at pfgc.com.
This morning, George will begin by discussing details of the agreement, including the strategic rationale and merits of the proposed deal. Jim will then follow with some of the financial details. We will then be happy to take your questions following the prepared remarks. Our remarks on this call contain forward looking statements and projections of future results. Please review the cautionary forward looking statements section in today's release and our SEC filings for various factors that could cause our actual results to differ materially from our forward looking statements and projections.
Now I'd like to turn
the call over to George.
Thanks, Bill. Good morning, everyone, and thank you for joining our call. Today is an exciting day for PFG, and we are thrilled to announce an agreement to acquire Core Mark, a transaction which would create a roughly $44,000,000,000 revenue company and make PFG the two convenience channel distributor with a broad North American footprint. As you know, PFG expanded into a C store distribution with the 2019 acquisition of Eby Brown. We've been extremely pleased with the performance of Eby and the opportunity that convenience store distribution has brought to PFG, particularly during COVID where having diverse channels was key.
As we've discussed, convenience stores have been a bright spot and helped partially offset pandemic related declines in restaurants, movie theaters and office coffee service. Welcoming Core Mark into the PFG family would be another huge step in our journey to becoming a leading player in convenience and continues to diversify the wide range of channels we already serve. Core Mark is one of the largest wholesale distributors to the convenience retail industry in North America. The company services approximately 40,000 customer locations in all 50 states, five Canadian provinces and two Canadian territories. Core Mark operates 32 distribution centers and has about 7,500 employees.
We have high expectations for the convenience channel. As I have mentioned, this has been one of the most resilient channels we have served during the pandemic, but more importantly, we continue to believe that there's ample room for growth in this channel. The convenience channel has evolved significantly over the past several decades, adding larger stores with more offerings for consumers. Even before the pandemic, convenience store traffic was on the rise as consumers were increasingly visiting the channel for a range of purchases. This plays into PFG's strength of offering a range of products from impulse purchased snacks and beverages that are the core offerings of Vistar to prepared food that plays directly into our foodservice strength.
The result is a strong combination for our company, consistent and resilient results in more challenging times as we've experienced this year and organic growth opportunities in a more normal operating environment. This deal, in particular, provides strong strategic merits, and I will discuss several of these before turning it over to Jim, who will provide more color on the financial considerations of the deal. and foremost, by acquiring Core Mark, we would welcome a high caliber workforce into the PFG organization, including a strong senior management team. Under their leadership, Core Mark has demonstrated significant and consistent growth. Core Mark's executives and associates bring extensive experience in the convenience channel.
And together with Eby Brown, we will have industry leading expertise to serve customers across The U. S. And Canada. And not only will we have the strongest players, but we are confident that we will work well together. Over the past several months, we have gotten the chance to know several executives at Core Mark, and it has been abundantly clear that our organization share a strong cultural fit.
This is an important consideration in M and A for PFG and was a focus with the Eby Brown and Reinhart transactions. We couldn't be more excited with the prospect of adding Core Mark's talented workforce to our company. the transaction continues to build PFG's geographic reach, product offering and efficiencies distribution, all of which will help us better serve our current customers and win new ones. We view convenience stores as a channel with significant growth potential, and we are now well positioned to capture more of it. Convenience foodservice is the area we expect to see the most benefit as a result of this transaction as we combine PFG's foodservice expertise with Core Mark's deep industry knowledge of the convenience store channel, replicating the success we have with Eby Brown.
Core Mark's exclusive partnership with Fresh and Ready Foods will position PFG well in the convenience foodservice space as consumers increasingly seek healthy, innovative, Core Mark also broadens our geographic footprint, filling in white space in our portfolio, particularly in The Western U. S. Core Mark also has a presence in Canada, which will represent PFG's move into the broader North American market. While we believe that there's still plenty of opportunity for growth here in The United States, we're excited at the potential to have new international facilities as well as the new business opportunities that may bring. When the transaction closes, the total enterprise will continue to be headquartered in Richmond, Virginia, and we will retain Core Mark's Westlake office with Eby Brown maintaining ongoing operations in Naperville, Illinois.
We have asked Scott McPherson to continue as Core Mark's President and Chief Executive Officer after the close of the transaction. Scott will also oversee the Eby Brown business. We are excited to bring his leadership to PFG. In total, Core Mark would add approximately $17,000,000,000 of net sales, which would bring PFG's total trailing twelve month net sales to approximately 44,000,000,000 We also believe that there are significant financial merits to the transaction, which Jim will describe in more detail in a moment. We expect this transaction to be accretive to our adjusted diluted EPS in the year after closing, excluding any synergies.
We are projecting significant net synergies, which we expect to be achieved by year three after close. There's also potential for cross selling synergies, which could be further accretive to margins. In summary, we are quite excited to announce the agreement with Core Mark and will move as quickly as possible to close the transaction. Core Mark brings a talented workforce with extensive experience in the convenience channel, enhancing the industry expertise of our existing Eby Brown business. Both organizations have similar customer focused cultures, which we believe will fit nicely together.
We expect the addition of Core Mark to enhance PFG's existing distribution platform in the convenience channel and geographic presence and product offering. We specifically see significant opportunity in broadening our foodservice capabilities in the convenience space and building on the momentum we have already established with Eby Brown. The deal will also expand PFG's portfolio of brands and strengthen our selling proposition to existing and potential customers. Of course, we will need to obtain U. S.
Federal antitrust clearance and a vote by Core Mark shareholders before the transaction closes. However, we hope to move as quickly through this process as possible to be able to welcome Core Mark's associates to the PFG family of companies. We see a bright future for the combined organization, which is another step in PFG's journey towards being a leader in foodservice distribution in The United States. I would like to thank everyone who worked tirelessly to get us to today and for all the work ahead in the coming weeks and months. We know our investors see value in Core Mark as over half of our equity is held by institutions with existing cross ownership of Core Mark.
PFG's recent sales trends have remained strong, including a record week during Mother's Day. And we've had the last nine weeks as our biggest nine weeks ever for our company. We are very pleased with the progress our organization has made and look forward to continuing the momentum we have built. With that, I'm gonna turn things over to Jim, who will give you more detail on the financial elements of the transaction.
Thank you, George, and good morning, everyone. As George mentioned, in addition to the significant strategic merits and the cultural alignment of the proposed transaction, we also expect sizable financial benefits. let's review the financial specifics of the transaction. Today, we've signed an agreement to acquire Core Mark in cash and stock, valuing the business at approximately $2,500,000,000 including Core Mark's net debt. Under the terms of the transaction, Core Mark shareholders will receive 23.875 per share in cash and 0.44 shares of PFG common stock for each Core Mark share.
After the deal closes, Core Mark shareholders are expected to own approximately 13% of the combined entity. We expect to finance the cash portion of the transaction with a combination of borrowings from our ABL facility, which is large enough to finance the entire cash portion of the transaction, plus proceeds from an issuance of new senior unsecured notes. Subject to market conditions, we currently plan to issue the new notes within the next couple of months and hold the proceeds until the closing of the transaction. We plan to issue approximately $780,000,000 worth of new notes with the additional proceeds used to retire our current 2024 notes. We currently expect to achieve $40,000,000 of total annual run rate net cost synergies within three years of the close of the transaction.
Synergies will be sourced from a combination of procurement, warehouse and route consolidation, and SG and A reduction. While we will move with appropriate speed upon closing, we will work to avoid any end market disruption to our customers, suppliers, and other stakeholders. While synergies are a part of the value proposition created by this transaction, our focus is on the growth potential of Core Mark and the benefits of an expanded presence in the convenience channel. We believe we are buying an outstanding asset, which will support our growth over the long term. We believe that the transaction will be accretive to adjusted diluted earnings per share in the year following closing, excluding any synergies.
As usual, closing is subject to US federal antitrust clearance and other customary closing conditions, including a shareholder vote by Core Mark shareholders. We expect the transaction to close in the first half calendar twenty twenty two subject to the closing conditions I just mentioned. In closing, this transaction meets all of the criteria we look for in our M and A process, including a strong strategic fit and alignment with current market dynamics and solid financial returns. We have a strong track record of successful m and a, including Eby Brown and Reinhart, and we expect this transaction to proceed in a similar smooth fashion. The combined organization expands PFG's geographic reach and adds to our strong position in the convenience channel.
And importantly, this transaction comes with financial benefits that we believe will drive shareholder value over the long term. We appreciate your interest in Performance Food Group. And with that, we'd be happy to take your questions.
Thank you. Our question comes from the line of John Heinbockel of Guggenheim.
Hey, George. Let me start with the foodservice opportunity right at Core Mark. What do you guys need to do right to drive foodservice growth at Core Mark? What are the sort of the steps? And how long do you think that takes?
Is that you want to be careful about quality? Is that a couple of years out or there's some quick wins?
Well, it's been an interesting time really in the last year. The food service part of the convenience business had suffered somewhat similarly to restaurants. People weren't real comfortable picking up items off of roller grills per se. But our Eby Brown business has done real well, and we've done exceptionally well. Performance Foodservice has continued to run double digit growth through that period of time into convenience stores.
So we have several turnkey programs as does Core Mark and be it for pizza or for chicken. And been real successful with our brands in our independent world that's been running over 50% now for several months. And we feel that we can do real well in convenience because it's already happening on a much smaller scale with our Eby Brown business. And as we put those programs together, what we're finding is those type of turnkey programs are attractive also to people that want to add to their menu, people that want to operate those kitchens. And then their fresh program will fit very well, not just with foodservice, but we have a large business in Vistar of prepared sandwiches, prepared salads.
And the network for distribution of those type of products that Core Mark has is superior to what we have today. So we see that as another, I guess, would call one of those sales type synergies that we should have. So I think we'll be ready to go once we can get the transaction completed.
And maybe secondly, as a tie on to that, right, you talked about the cultural similarities, right? So your focus has always been how can we invest in the business to grow the top line? Maybe what would they or you like to have them reinvest in, whether it's product, people, It's not necessarily a salesperson centric business, but where they could reinvest more in the business to drive more top line growth. Where are the big opportunities maybe beyond foodservice product?
Well, they're pretty mature right now, they've always invested. That was a big part of the conversations that I had with their CEO was that they're poised to grow and they're actually in good shape from a capacity standpoint. But similar to our EV business, the bulk of their business is designed to fulfill demand. And it's a different step when you want to create demand. And I think that's where the company is working together that we can do a good job in the foodservice area.
And there's 180,000 convenience stores between U. S. And Canada. And that to me is potentially 180,000 opportunities for us to create demand in foodservice. And they sell about 40,000 of them today.
So that's off to a pretty good start. Thank you.
Thanks, John.
Your next question comes from the line of Edward Kelly of Wells Fargo.
Hi, guys. Good morning. George, I wanted to start just by I wanted to I really wanted to ask you about sort of the evolution of your decision to get deeper into the C store business. So when you bought Eby Brown, it seemed like it was a little bit of a toe in the water. Obviously, it's a different business than the traditional broadlines distribution business.
You're obviously making a bigger leap now. Could you just maybe take a step back and talk about how your interest in this business has evolved over time to get you to where you are?
Well, it's been a long time. I was actually on Eby Brown's Advisory Board for several years. I've followed Cormark for, I don't know, probably twenty years. Definitely doing Eby I think was the right route to go because you got to test your capabilities and test what's available from a foodservice standpoint. And we've been very successful with that business.
They're growing at a real good rate. The profitability has increased at a good rate as well. We got really good people there. I think Core Mark is the one that just takes us to a different level. Would be nice to have national scale and to have a ton of scope.
We don't have that in all the businesses that we're in. We do a significant pizza business into convenience and this will enhance it. And the last several years, we've been able to grow double digit by just having a portion of our foodservice people focused on convenience. And we plan on having our sales force really focused on that category more. And that doesn't mean taking any attention away from our foodservice at all.
And today, some of the customers we deliver out of BB and if their offering is really extensive, we deliver it out of Performance Foodservice. And quite frankly, we've been more successful out of Performance Foodservice than EB when it comes to Foodservice product.
Great. And then the other question I wanted to ask you is, as you think about from a company standpoint spending the $2,500,000,000 obviously, Reinhart's a deal that the market totally loved. This deal is a little different for you. How do you view the opportunity at buying something like Core Mark versus buying a business like Reinhart? And should we, as investors, just kind of look at them similarly in terms of what they can do for your business over time?
I would say similarly. The transactions are similar in size. We certainly are getting more expertise that we don't necessarily have with Core Mark than we did with Reinhart. I think they're both great cultural fits, but we didn't know the Reinhart people much better than the people with Core Mark. But it's huge industry.
There's a lot of players in it. It's very fragmented, similar to foodservice. You have a need in the industry to continue to grow the foodservice part of their business. There are some that have just been extremely successful with it. And I just look at it as a great opportunity, and I look at it as every bit as good an opportunity as Reinhart.
If you look at Reinhart, most of the integration is done. And to a degree, it's an entirely different integration team. But what we found by just kind of doing EB is there's just so much crossover between the two industries. And don't forget the match between Vistar and AcorMark and in EV as far as suppliers go and just the inbound advantages that we can get, the logistics advantages that we can get, we've been able to show that that's there. And we've done well from a profitability standpoint with EB, and I suspect we'll do as well with Core Mark.
Great. And then, Jim, just one last one for you real quick here. In terms of the accretion, is there anything unusual within here sort of for D and A, for instance? Are you excluding amortization? Is it just the $10,000,000 that they report?
Or is there more in that D and A number? Is there anything else that we should be thinking about as we're doing accretion? And also, I'm kind of curious on interest rate, what you're thinking about?
Ed, no, there's there's nothing unusual in in the accretion calculation. It's consistent with how we calculated accretion with Reinhart. So that I think that should give you what you need for your model. You know, interest rates, of course, look look very good. I'm not gonna I'm not gonna forecast an interest rate on a debt offering we haven't done, but but I certainly feel like it's a it's a good period in time for us to, to go to the debt market.
I really believe that, how we've capitalized this deal and the conservative capitalization structure is very helpful. It's definitely a balanced approach to how we're financing the deal. And then last, another thing I'd like to say is I do want it to be acknowledged that we're building a company that's much more diverse than it's been in the past in the standpoint of resiliency. And we've got clearly got within food distribution serving two different industries. Now we're adding convenience, and both of those are very resilient in their own way in different economic cycles.
Your
next question comes from the line of John Glass of Morgan Stanley.
Business, can you just talk about the return or just in general, the C store distribution business? It's a lower margin business than your aggregate and the food distribution business. What are the returns on invested capital? Can you just compare like the C store distribution business on a returns basis versus the distribution business? And can you also compare Eby Brown's profit margin, you know, profile versus this company?
Is there an opportunity and where is the opportunity in terms of is this accretive to your margin for e you know, Eby Brown versus the Core Mark business? And I have a follow-up.
Core Mark is you know, it's definitely a lower margin business than our existing business, but I think a lot of that is kind of how you look at margin. They run a very good return on invested capital. Their profit per case is very similar to Performance Food Group as a whole. You have the tobacco component, which really distorts the return on sales. That has been playing out for quite a while.
It's a business that we do not do anything but fulfill demand. And you have to have that product to be in it. If you get outside of that type of product, they're quite profitable, grown their sales, their earnings just about every year. The margins within Core Mark are better than the margins within EV. Part of that is scale.
Part of that is mix of business. We expect to see our EV mix of business improve based on the learnings that we get from Cormark. We really look at our business as how much gross profit dollars we produce and how much of it makes its way to the bottom line and what our return on invested capital is. We don't look at margin as much. I would call Core Mark the same.
If you look at what they disclose around earnings, their focus is on the gross profit dollars that they produce and how much of that makes its way to the bottom line, and they do every bit as well as Performance Food Group does when it comes to that measurement.
All right. Thank you. My follow-up is this. What is the bandwidth for you during this period of time to do acquisitions in the distribution business? Or should we think about this as there's a period of time at least a year where you can't be active in that space?
And and you've you've outlined about a year to close this deal, and there's regulatory processes. Is there a risk that there's divestitures of some sort, or did you go through this pretty carefully? And you've gotta go through the process, but you don't think there's going to be surprises on, you know, warehouse distribute, you know, divestitures, etcetera?
I can handle the integration question. If you want to handle the divestiture question, George.
You got it, Jim. Go ahead.
Yes. So I think the easiest way to think about it is clearly two large segments. Each of them have significant integration bandwidth. We've completed integration of the Reinhart transaction, and that integration went exceptionally well, exceeded our expectations. Really happy with how that all came together, And we learned quite a bit from it about how to do a superb job of integration.
And all those learnings will be shared and brought over into how we integrate this acquisition into the Vistar segment. So we now have additional bandwidth, and we're we're free from a bandwidth standpoint in the Foodservice division. So I don't see any concerns there.
Yes. As far as divestitures, I mean, that's not anything that we could be we don't control that process. We've spent a great deal of time on it. We feel that we don't have a national issue, we don't have a regional issue and we don't have a local issue. But we have to make sure that we do a good job of presenting that.
We've got provisions in the deal should there need to be divestitures. But we're going into this confident that we won't have a divestiture issue.
Thank you.
Your next question comes from the line of Lauren Silberman of Credit Suisse. So just a follow-up on the regulatory approval process. Is the expected time line of the closing of the deal any longer than what you've seen in prior deals? Is there any reason to think why it would be longer?
Lauren. Yes, go ahead, Jim. No, go ahead, Jim.
All right. Look, Lauren, every deal that goes in front of the FTC is a different deal. They all stand on their own merits. They're all evaluated on their own merits. We're very confident our deal will be approved.
And based on everything we understand, we expect to close in the first half of twenty twenty two and really not much more we could project at this point.
Okay. And then on the synergies, can you just speak to the cadence of the $40,000,000 of cost synergies over the three years post closing? And are you willing to just put any real numbers around the EPS accretion?
Not willing to put a number around the EPS accretion. And from a synergy standpoint, they typically ramp up. And I think George would agree, we don't buy a company to strip it down. We don't buy a company so we can strip down another one. Buy a company because we believe in the value that it brings to the organization and the things that make it special and the cultural fit.
That said, I think that in the year, you definitely spend a lot of time looking at the company and trying to figure out have your assumptions about synergies been correct, do your homework, and then synergies begin to ramp up across three years.
Okay. And then just my final question is given, you know, you're speaking to the the opportunities for food service for both easy as well as for Core Mark, is the underlying read through that underlying margin should continue to improve in these businesses going forward?
Yes. I think it might be. Of course, that's our intent, right? And we feel that, that will be the case. I don't know how long that will take.
As I said, we've had good success with EB, but much smaller, easier to get your arms around. And then I also want to go back to that synergies for just a minute. We put a number in there that we're serious about. We're also serious about the culture and serious about keeping people. So a lot of those synergies are things that take a little while and it's hard work.
And they're around logistics and around just running the business a little better. I would say that with Reinhart, we've done a good job. But the success of Reinhart, the synergies success that it's good. But the success in the growth of earnings as we look at 2019 are the real deal. That synergies tend to be one time.
And if you grow earnings, then that goes on into we're serious about a $40,000,000 number, but the cadence of it will be just as Jim said, it will build and it will take some time. It's just how we do things.
Great. Then just a follow-up to that, I guess.
Do you speak to or
can you speak to just with respect to the overall deal process, how long you've been contemplating and in discussion regarding this deal? I know you've been following the company though.
Serious discussions for half a year. I would put that as the amount of time, about six months.
Great. Thank you so much. Appreciate it. Your next question comes from the line of Peter Saleh of BTIG.
Great. Thank you. I know you guys showed the geographic overlap on Slide 10 of the presentation, so very much appreciate that. Is there any way for you to quantify the overlap, the customer overlap between EV and core market at this point?
The customer overlap is just not even material. Customers in convenience industry typically have a supplier And you don't see very often that convenience store will buy from more than one person. They'll have a portion of their purchases that will be direct from suppliers And DSD is still pretty big in that industry. But as far as similarity to foodservice, where you may see three, four distributors in an account, you don't really see that inconvenience.
Great. Very helpful. And then just a question on the capital investment. Should once this deal closes, is there any anticipation of any major capital infusion or capital investment you guys need to make in this brand? Or should we continue to expect a similar capital investment as they have been making in the past?
Well, they've always invested in the business, and it's very well run. And I don't see any unusual capital investments. They can come in chunks and sometimes you need to build new distribution centers. We built a couple for EB just this last year. So there could be some unusually high and some unusually low years.
But it's probably going to look like what Core Mark has always looked at from a CapEx standpoint.
Great. Thank you very much.
Your next question comes from the line of Sal Masciata of Seaport Global.
This is Brian Lombardi with Seaport. I'm just skimming through the contract while I'm listening to the call, and I noticed that there's a $1,800,000,000 divestiture cap, in other words. And I hear you, you don't expect divestitures, and I think you're making a good case for why not. But is there any thought process that informed that $1,800,000,000 cap?
Yeah. We did quite a bit of work and did the homework we need to do to make sure we felt very comfortable with that number. And of course, that's a negotiation we're very excited that the deal will be approved.
Is the right way to think about that, that's the maximum that the parties were comfortable with? Or I guess the question I was trying to ask is, is there a compartment that that $1.8 fits into conceptually that makes it like the logical limit?
I'd say it's the maximum we were comfortable committing to today.
Understood. Thank you.
Your next question comes from the line of Nicole Miller of Piper Sandler.
Thank you. Two questions. Understand the team and the culture alignment, can you talk about the brand equity, even going back to Eby Brown of what you acquired? And if you think longer path down the road, do these all have opportunity to be branded under one banner? Or is that not an important consideration for this piece of the industry?
Yes. We run with a hefty dose of autonomy, and I think that those decisions will come from Scott McPherson and Tom Wake and Pat Hagerty and their people. Right now, I mean, obviously, the Cormark name means a lot. We think it has a lot of brand equity. There are markets where the Eby Brown name has a lot of brand equity.
We are certainly going to run the businesses That will take some time. And I'm not sure really where we'll go with that. If you look at Reinhart, most of the Reinhart companies made the decision to adopt the performance banner, The ones in Wisconsin where there's a great deal of brand equity with the Reinhart name, they're still continuing with the Reinhart name. I think those are decisions that the business people will make that they'll involve their customers, and that's something that we'll figure out down the road.
But I think both names come with a pretty good dose of brand equity.
Thank you. And then just a and final question. If I heard the prepared commentary correctly, you said recent sales trends were strong, especially the last nine weeks. Can you just give us the end point to back into I don't know if that was yesterday or last week to back into the nine weeks? And then does that put you on track to hit the 8.2% guided range for the quarter or something more or
The last nine weeks are the biggest nine weeks that we've had as a company. We're, of course, confident in that $8,200,000,000 number. It is a difficult industry right now to kind of figure where we're at. I mean, are seeing people open back up where we're getting large opening orders. How much that's contributing to the current growth is hard, quite frankly, to figure out.
We still have some markets that are fairly depressed, primarily Northeast, West Coast. And we have well over half of our companies that have been setting record week after record week. I would say we're confident. What gives us confidence is if you look at a two year stack, 2019 to 2021, it's really the best growth we've ever run on a two year stack, particularly in independent. So are we in a little bit of a bubble?
I don't know. If we are, we're still very confident based on the trendings that we see, the number of customers that we're selling and kind of where our growth is coming from. So I would say we have a great deal of confidence in that $8,200,000,000 number.
Thank you.
Thank you. I would now like to return the call to George Holm for closing comments.
Just have a few takeaways I'd like to put out there, things that are very important with this deal. It expands our geographic reach. It increases overall scale in C store distribution. It enhances our customer base and our product offerings, comes with significant net synergies, and it's accretive to adjusted diluted EPS. And I would like to thank all of you on such short notice for taking the time to listen to our presentation and to ask us several very good questions.
Thank you.
Thank you. That does conclude today's conference call. You may now disconnect your lines and have a wonderful day.