Performance Food : Third Quarter 2024 Transcript

Corrected Transcript

08-May-2024

Performance Food Group Co. (PFGC)

Q3 2024 Earnings Call

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Performance Food Group Co. (PFGC)	Corrected Transcript
Q3 2024 Earnings Call	08-May-2024

CORPORATE PARTICIPANTS

William S. Marshall	Patrick Hatcher
Vice President-Investor Relations, Performance Food Group Co.	Chief Financial Officer & Executive Vice President, Performance Food
George L. Holm	Group Co.
Chairman & Chief Executive Officer, Performance Food Group Co.

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OTHER PARTICIPANTS

Mark Carden	Jeffrey A. Bernstein
Analyst, UBS Securities LLC	Analyst, Barclays Capital, Inc.
Jake Rowland Bartlett	John Heinbockel
Analyst, Truist Securities, Inc.	Analyst, Guggenheim Securities LLC
Edward Kelly	Andrew P. Wolf
Analyst, Wells Fargo Securities LLC	Analyst, C.L. King & Associates, Inc.
Alexander Slagle	Brian Harbour
Analyst, Jefferies LLC	Analyst, Morgan Stanley & Co. LLC
Kelly Bania	Peter Saleh
Analyst, BMO Capital Markets Corp.	Analyst, BTIG LLC
Lauren Silberman
Analyst, Deutsche Bank Securities, Inc.

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Performance Food Group Co. (PFGC)	Corrected Transcript
Q3 2024 Earnings Call	08-May-2024

MANAGEMENT DISCUSSION SECTION

Operator: Good day, and welcome to PFG's Fiscal Year Q3 2024 Earnings Conference Call. [Operator Instructions]

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

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William S. Marshall

Vice President-Investor Relations, Performance Food Group Co.

Thank you and good morning. We're here with George Holm, PFG's CEO; and Patrick Hatcher, PFG's CFO.

We issued a press release this morning regarding our 2024 fiscal third quarter results, which can be found in the Investor Relations section of our website at pfgc.com. During our call today, unless otherwise stated, we are comparing results to the results in the same period in fiscal 2023. The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found in the back of the earnings release.

As a reminder, in the fiscal first quarter of 2023, we updated our segment reporting metrics to adjusted EBITDA from the prior EBITDA metric. Our remarks on this call and in the earnings release contain forward-looking statements and projections of future results. Please review the cautionary forward-looking statements section in today's earnings release and our SEC filings for various factors that could cause our actual results to differ materially from our forward-looking statements and projections.

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

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

Thanks, Bill. Good morning, everyone, and thank you for joining our call today. This morning, I'd like to share our results from the fiscal third quarter, provide some color on the current business environment and discuss our plans for the fiscal fourth quarter and beyond.

As you know, the calendar year began with a challenging weather in January, a choppy inflationary environment, calendar differences and early signs of consumer pressure. Nonetheless, I am proud of our organization and how we were able to achieve positive results despite these headwinds.

In particular, our Foodservice business rebounded nicely in February and March, producing improved independent case growth and stable chain performance. Our Convenience segment continued to experience difficult top line trends, though it has remained focused on winning new business and tight operating expense control, helping the bottom line performance.

We were encouraged by the sequential month-to-month improvement in C-store trends during the quarter. Vistar also experienced a more challenging top line in the fiscal third quarter after very strong growth in prior quarters. We continue to feel very good about how we are positioned in the market, which we believe will produce profitable

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Performance Food Group Co. (PFGC)	Corrected Transcript
Q3 2024 Earnings Call	08-May-2024

long-term growth. We were optimistic about the fiscal fourth quarter and our momentum into fiscal 2025, which is reflected in our guidance. Patrick will discuss our guidance in more detail shortly.

Before turning to Patrick, I will provide color on our results, discuss our strategy and outline reasons for optimism. Let's review some of the highlights from our most recent quarter and various factors impacting the results.

Starting with Foodservice, segment net sales were up 1% in the fiscal third quarter with similar case volume growth in the period. However, if we walk through the three months of the quarter, it shows a very different picture. We started the quarter with a low single-digit case decline in January. We went positive in February and had a strong March, which has continued into fiscal Q4.

Importantly, independent case volume grew in all three months of the quarter, including nearly 6% growth in both February and March. Independent case growth was consistently in the middle single-digit range for each week from the second week of February through the end of the quarter. This growth outpaced the total industry, producing steady market share gains. In fact, our data shows nice share performance across both independent and chain restaurant accounts for the quarter. Gaining more market share across our Foodservice business in the fiscal third quarter than we did in the fiscal second quarter.

I'd like to repeat that because it's so important. Our Foodservice business gained more market share in the third quarter than the second quarter. This is a testament to our sales organization's ability to compete for and win new business despite the headwinds facing the restaurant industry.

Our Foodservice business experienced a deflationary headwind in the first half of the fiscal year, which continued into early calendar 2024. We're pleased to see this flipped to modest inflation in both February and March. This improvement occurred despite persistent deflation in cheese, though we are seeing sequential improvement in that important commodity as well. Given the steady sequential move in most commodities, we continue to expect low single-digit foodservice inflation in the fiscal fourth quarter. We expect this to provide a benefit to both the growth and adjusted EBITDA margins in the period.

Turning to our Convenience business, as I mentioned at the opening of this call, industry top line trends remain difficult, which we attribute to higher candy, snack and tobacco prices in the C-store. Despite some relief on gas prices, same-store sales in the convenience channel remained soft relative to historic trends.

On the positive side, our top line results continue to outpace the total industry in key categories, including foodservice, snacks and candy, reflecting new business wins and market share improvement.

We are consistently adding new accounts and expanding services to current customers. This new account growth, coupled with the successful launch of several foodservice programs, gives us confidence that our top line performance within Convenience will continue to improve moving forward.

We continue to gain traction with our efforts to grow Foodservice and Convenience. This is demonstrated by our recent collaboration with GPM, launching a nationwide pizza concept, and our progress in selling PFG branded foodservice concepts to convenience customers. These activities drive value for both PFG and the customers we serve.

Despite the challenging top line result, our Convenience organization has continued to execute extremely well. A diligent focus on reducing shrink in the warehouse, coupled with the tight labor management, has produced good

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Performance Food Group Co. (PFGC)	Corrected Transcript
Q3 2024 Earnings Call	08-May-2024

operating leverage. Looking ahead to the fiscal fourth quarter, we expect sequential improvement in sales and continued operating expense control.

Turning to Vistar, total case volume was essentially flat in the fiscal third quarter as growth in the vending, travel and hospitality channels were offset by declines in theater and office supply. Segment net sales increased 1.7% in the quarter. As expected, the rate of inflation at Vistar continued to decelerate and was up 4.7% in the fiscal third quarter. The rate of deceleration was similar to the rate declines from the fiscal first quarter to fiscal second quarter.

As we have discussed on prior calls, we expect inflation to settle in at a low single-digityear-over-year rate as we close fiscal 2024, and hold steady in that range going forward. Vistar's high exposure to consumer packaged goods products support consistent inflation in this range.

As we look ahead to the fiscal fourth quarter, we anticipate better volume, sales and profit performance at Vistar due to improving fill rates in the vending channel and better growth in the value channel. This is a direct result of new and expanding business opportunities.

Before turning to Patrick, who will discuss our results and specific drivers of our performance and then provide more color on our guidance for fiscal 2024 and beyond, I want to summarize our fiscal third quarter and leave you with a few thoughts on the future.

The fiscal third quarter was certainly challenging for our industry and organization, primarily due to January's inclement weather conditions and some calendar differences. However, we are encouraged by more recent trends. Additionally, we have a line of sight to new business wins in each of our three operating segments, which we expect will provide a tailwind to top line performance in the months ahead.

A more stable inflationary environment also bodes well for the future. In our Foodservice business, this means a return to more normal rates of low single-digit inflation, which provides visibility towards improving gross margins. For Convenience and Vistar, lower levels of absolute inflation should ease pressure on the end consumer.

Over the long term, PFG's position as a leader in the food-away-from-home market provides diversification across a range of profitable and growing channels and markets with significant whitespace. We are confident that our investment in PFG's core initiatives and our associates will enable us to achieve long-term profitable growth, which we believe will result in positive shareholder returns.

We appreciate your interest in Performance Food Group. With that, I will turn it over to Patrick, who will provide more detail on our financial performance and outlook. Patrick?

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Patrick Hatcher

Chief Financial Officer & Executive Vice President, Performance Food Group Co.

Thank you, George, and good morning, everyone. As George mentioned, there are certainly headwinds to overcome in fiscal third quarter of 2024. However, our strong financial footing and market position produced a solid profit result that we expect to build from in the fiscal fourth quarter and into fiscal 2025.

This morning, I will review a few highlights from our most recent quarter, then spend most of my time discussing our financial position, priorities for the months ahead and provide some additional detail on our guidance. We'll then be happy to take any questions you have during the Q&A portion of the call.

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Performance Food Group Co. (PFGC)	Corrected Transcript
Q3 2024 Earnings Call	08-May-2024

As you saw in our press release this morning, PFG delivered solid profit and cash flow results during the fiscal third quarter. This was possible because of our company's focus on driving sales into the most profitable channels and a disciplined focus on cost control, while also continuing to invest behind future growth initiatives.

As we mentioned last quarter, we started the calendar year facing a difficult January due to bad weather throughout the month. This resulted in a slight case decline for our total business in the fiscal third quarter of 2024. PFG generated total net sales of about $13.9 billion or a 0.6% increase year-over-year.

Trends improved in February and March, which allowed us to finish the quarter on solid footing. For the full third quarter, organic independent restaurant case growth was 4.3%, including nearly 6% growth in both February and March. We continue to gain market share in the independent restaurant channel across a broad range of geographies and concepts, highlighting our favorable position in this important area of our business.

Over the full three-month period, chain restaurant cases were essentially flat, which we were very pleased with, given the impact of a tough January. We recently onboarded new chain business, which should help accelerate growth in the fiscal fourth quarter and into fiscal 2025.

Total PFG gross profit increased 3.8% in the fiscal third quarter to $1.6 billion. Once again, our business benefited from positive mix shift in the period. Importantly, our Foodservice segment experienced inflation in the quarter after two consecutive quarters of deflationary pressure. The resumption of inflation in several key commodities gives us confidence in improving profit conditions going forward, which I will touch upon when I review our guidance.

On a total company consolidated basis, inflation was slightly higher in the fiscal third quarter compared to the fiscal second quarter, up 3.6% year-over-year. Higher inflation in Foodservice was offset by decelerating inflation in both Convenience and Vistar, which was in line with our model.

As George mentioned, Vistar inflation was squarely in the mid-single-digit range, while Convenience inflation moderated slightly to just below 7% for the fiscal third quarter. Based on our experience, it's not uncommon for Convenience inflation to remain slightly more elevated due to consistent price increases in the tobacco space. I will touch upon tobacco inflation and its impact on our results in a moment.

Gross profit per case was up $0.27 in the third quarter as compared to the prior year's period. We expect our gross profit per case to benefit from inflation in Foodservice. This is an important component to our bottom line results and helps support our growth through targeted investments in our workforce and technology.

In the third quarter of fiscal 2024, PFG reported net income of $70.4 million, down 12.3% year-over-year. Adjusted EBITDA increased 1.9% to approximately $321 million, just above the midpoint of the guidance we announced last quarter.

Diluted earnings per share in the fiscal third quarter was $0.45, a decrease of 11.8%, while adjusted diluted earnings per share was $0.80, a 3.6% decline year-over-year. Our effective tax rate of 27.3% in the fiscal third quarter was down compared to the 28.1% rate in last year's comparable period, mainly due to lower foreign taxes as a percentage of income, slightly offset by an increase in non-deductible expenses and state taxes as a percent of income.

Our financial position remains very strong, and we are generating significant cash flow through a combination of operational performance and diligent working capital management. Over the first nine months of fiscal 2024, PFG

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Performance Food Group Co. (PFGC)	Corrected Transcript
Q3 2024 Earnings Call	08-May-2024

generated operating cash flow of $956.7 million, a nearly $300 million increase compared to the first nine months of last year.

Free cash flow increased to $712.3 million over the first nine months of the fiscal year, up from $480 million last year. We expect to deploy our cash flow in value-creating activities, including capital expenditures to expand our capacity and support our growth. Over the first nine months of fiscal 2024, PFG invested $244.4 million in CapEx.

After capital expenditures, our remaining priorities for capital deployment are unchanged and include M&A, leverage reduction and share repurchases. We evaluate these decisions based upon the value we believe each would create for our shareholders and strategically deploy capital towards this view. Our share repurchase program takes several factors into consideration, including the relative value of our stock, as well as the valuation compared to historic levels.

While we did not repurchase any shares in the fiscal third quarter, we believe that our repurchase authorization, which had about $211 million remaining as of March, is an important component of our capital allocation plan.

We also continue to look at strategic M&A as another avenue to create shareholder value. We are proud of PFG's track record of completing and integrating acquisitions throughout our history. The team is continuously working to identify interesting opportunities while remaining disciplined on price and strategic fit.

Finally, we continue to focus on maintaining a healthy balance sheet. We closed the fiscal third quarter below the midpoint of our 2.5 to 3.5 times net debt to adjusted EBITDA target and feel very comfortable in this range. Earlier this month, we called $275 million of our outstanding 2025 notes, utilizing our ABL facility to take advantage of relative rate efficiencies.

In total, at the close of the fiscal third quarter of 2024, 86% of our total outstanding debt was at a fixed rate, including interest rate swap contracts. We believe that our current level of debt provides ample flexibility to fund our ongoing operations while leaving room for capital allocation priorities that I just highlighted.

I'll finish up with an update on our guidance and some factors impacting our outlook. For the fiscal fourth quarter of 2024, we expect net sales to be in a range of $15 billion to $15.4 billion and adjusted EBITDA to be in a range of $430 million to $450 million.

On the top line, our sales guidance for the fourth quarter suggests a full year net sales result of $58.1 billion to $58.5 billion. This is below our $59 billion to $60 billion range we had provided last quarter and largely reflects the top line softness experienced in the fiscal third quarter. However, despite the top line challenges, we are tightening and raising the bottom end of our full year adjusted EBITDA guidance to a range of $1.48 billion to $1.5 billion compared to the prior $1.45 billion to $1.5 billion range.

As you can see, we expect strong profit growth acceleration in the fiscal fourth quarter. We are confident in our projections due to a line of sight on several key items. First, as mentioned earlier, we are onboarding new business in all three segments, which should drive profitable top line case sales in the coming months. Second, the resumption of low single-digit inflation in Foodservice compared to deflation in the first half of the year is expected to result in higher gross profit per case.

As a reminder, deflationary pressures were felt more heavily in our independent restaurant case business due to product mix and pricing structure in that business, which is largely based on a percent markup. Positive inflation

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Performance Food Group Co. (PFGC)	Corrected Transcript
Q3 2024 Earnings Call	08-May-2024

should help our profit performance over the next several quarters with a benefit from both year-over-year gains as well as stronger mix shift.

Finally, several tobacco suppliers have announced price increases on their products, which we expect to result in favorable inventory holding gains in the fiscal fourth quarter of our Convenience segment.

Taken together, we believe our fiscal fourth quarter profit growth rate will accelerate nicely over the coming months. This should also provide a tailwind into fiscal 2025. We are currently reviewing our fiscal 2025 targets and expect to provide an update on our August earnings call in line with our normal cadence.

With that said, our strong adjusted EBITDA result over the past two years, coupled with the tailwinds I just mentioned, should put us comfortably within the $1.5 billion to $1.7 billion adjusted EBITDA range that we set as a three-year target at our June 2022 Investor Day. As we have previously noted, our expectation is to be close to the $1.5 billion adjusted EBITDA level in fiscal 2024 and expect solid growth in fiscal 2025.

To summarize, we are pleased with how we are operating as a company and believe that the industry challenges seen in the fiscal third quarter will prove to be temporary. We expect results to accelerate in the fiscal fourth quarter and into fiscal 2025, underpinned by specific items that are in our forecast model.

Thank you for your time today. We appreciate your interest in Performance Food Group. And with that, we'd be happy to take your questions.

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QUESTION AND ANSWER SECTION

Operator: Certainly. [Operator Instructions] We will take our first question from Mark Carden with UBS. Please go ahead.

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Mark Carden

Analyst, UBS Securities LLC

Q

Good morning. Thanks so much for taking the questions. To start, you noted your market share growth accelerated relative to 2Q and it sounds like you guys weathered some of the macro headwinds better relative to the industry as a whole. So any initiatives jump out at you in terms of driving the stronger relative performance? Just what in your mind was most important in driving that improvement there?

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

A

Well, it would be definitely new accounts. We still have seen a difficult penetration market out there. The existing accounts, I guess, in aggregate, just aren't doing the business that they were doing before.

I would also note, too, with the quarter that if you took a two-year stack on our independent, it would have been a 13% growth. So we were north of 8% two years ago and then 4.3% this year - or last year and this year. But it's definitely new business that's driving our growth.

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Mark Carden

Analyst, UBS Securities LLC

Q

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Performance Food Group Co. (PFGC)	Corrected Transcript
Q3 2024 Earnings Call	08-May-2024

Okay, great. That's helpful. And then just overall, have you seen much of a shift in distributor price competition, just given some of the broader challenges other that are in the industry have been calling out?

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

A

Well, I think that our industry has always been very competitive. There's a lot of players in it. And I think when growth is hard to come by, I think that you tend to get a market that's a little bit more competitive. But we really haven't seen that much of a change.

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Mark Carden

Analyst, UBS Securities LLC

Great. Wish you good luck.

Q

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

Thanks.

A

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Operator: Thank you. We'll take our next question from Jake Bartlett with Truist Securities. Please go ahead.

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Jake Rowland Bartlett

Analyst, Truist Securities, Inc.

Q

Great. Thanks for taking the question. Mine was on the environment out there. And you gave guidance for the third quarter after the weather in January. So presumably that was kind of incorporated. So seems like the sales miss was more due to the environment. You talked about an improvement since. So I'm wondering whether the competitive - or not competitive, whether the consumer environment has gotten any better. Is that driving any accelerating trends, or is it just that your new customers and your pipeline and your actions are driving that improvement? Trying to get a sense as to the trajectory of the consumer right now and your customer business.

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

A

Well, the softness for the quarter is, it's almost entirely a January story. January was really difficult. I would say, if you looked at our customer base, QSR has definitely softened. It's a fairly large part of our business, definitely casual dining. I mean, there's winners in both, but casual dining is very soft, and we're finding the independent restaurateur to be doing okay. I wouldn't say great, but I would say okay, but there are many more of them than there were before. So it's the new accounts and our ability to continue to run in that 6%, 7% growth in new customers sold. But I don't see a really bad environment out there. I just think that we've got some stressed consumers that are probably at the lower income level.

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Jake Rowland Bartlett

Analyst, Truist Securities, Inc.

Q

Got it. Great. And my second question is on margins. You beat on margins a little bit in the third quarter. The question is, what was the driver of that? Was it the gross profits and the inflation being a little stronger than expected, or was it about productivity improvements that helped in the third quarter?

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Performance Food Group Co. (PFGC)	Corrected Transcript
Q3 2024 Earnings Call	08-May-2024

And I think as you - Patrick, as you listed, I think, the three drivers for improving a solid fourth quarter, improving productivity wasn't one of them. I'm wondering what the trajectory is there on just your operating cost, your leverage and how you're - what kind of progress you're making there in bringing down costs.

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George L. Holm

Chairman & Chief Executive Officer, Performance Food Group Co.

A

Yeah. Well, as far as margin, particularly gross profit per case, that's a function of mix as we continue to grow at a faster rate in independent than we do the chain business.

As far as productivity goes, I would assume you're speaking warehouse and delivery productivity or operational productivity. We continue to improve. We're not back to 2019 levels, but we do like the improvement that we're seeing. And then, when you get to both our Convenience business and our Customized business, they're really doing well from a productivity standpoint, doing actually better than 2019 numbers.

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Jake Rowland Bartlett

Analyst, Truist Securities, Inc.

Great.

Q

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Patrick Hatcher

Chief Financial Officer & Executive Vice President, Performance Food Group Co.

A

And Jake, I was just going to add. I mean, it's a good point that we didn't call that out specifically as one of the things that are going to drive our Q4 results. But as George mentioned in his comments, we do expect operational efficiencies, certainly in Convenience and all the businesses, to continue to perform as they've been performing and to improve.

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Jake Rowland Bartlett

Analyst, Truist Securities, Inc.

Great. I appreciate it. Thank you.

Q

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Operator: Thank you. We'll take our next question from Edward Kelly with Wells Fargo. Please go ahead.

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Edward Kelly

Analyst, Wells Fargo Securities LLC

Q

Hi. Good morning, everyone. I wanted to start with just Q4, and I guess maybe a bit more detail and level of confidence. So EBITDA is up 14% at the midpoint. Can you talk a little bit more about the bridge? Patrick, when you gave those few factors, I don't know if they were listed in order of magnitude. I'm curious about the size of any tobacco gain, for instance.

And then, within the guidance, do you really just need trends in April to hold or are you expecting any improvement in that regard? And as it relates to 2025 with all this, I mean, if you do this number, I mean, doesn't this speak well about like how you're thinking about 2025, particularly the first sort of three quarters of the year, or are there other puts and takes to consider?

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Patrick Hatcher

Chief Financial Officer & Executive Vice President, Performance Food Group Co.

A

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