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Performance Food Group Company (NYSE:PFGC)
Q4 2018 Earnings Conference Call
August 15, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the PFG Fiscal Year 2018 Q4 year-end earnings conference call. Today's call is scheduled to last about an hour, including remarks by PFG's management and the question and answer session. I would like to now turn the call over to Mr. Michael Neese, Vice President, Investor Relations for PFG. Please go ahead, sir.

Michael Neese -- Vice President of Investor Relations 

Thank you, Krystal, and good morning, everyone. We're here this morning with George Holm, Performance Food Group's CEO, and Jim Hope, PFG's CFO. We issued a press release regarding our 2018 fiscal fourth quarter and full-year results this morning.

The results discussed in this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found at the back of the earnings release. 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 cautionary statements and projections of future results. Please review the forward-looking statements section in today's earnings release our SEC filing for various factors that could cause our actual results to differ materially from forward-looking statements and projections.

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

George Holm -- President and Chief Executive Officer

Thanks, Michael. Good morning, everyone. Thanks for joining our call today. Before I pass the call on to Jim, I'd like to discuss a couple quick highlights of our full-year results. Also, we're going to keep our introductory remarks short so we can get to questions early and have plenty of time to answer all the questions.

Our business generated solid net sales growth over 5%. Gross profit increased nearly 8% and adjusted EBITDA grew over 9% for Fiscal Year 2018. Our double-digit earnings growth and strong cashflow were in line with our expectations. Excluding our closed facility in Georgia, net sales would have grown by 6.5%. We're now more than a year past the closing of that facility, so those comparisons will now be behind us. Total case volume grew 3%, which included a 6.1% increase in independent cases.

Vistar had an exceptional year, particularly the back half of Fiscal 2018 as the strategic investments we made two years ago paid dividends in the fourth quarter and we expect them to help fuel future growth. Our return on invested capital improved substantially.

I would like to provide a little bit more detail on Performance Food Service fourth quarter results, which were below our expectations. Performance Food Service's fourth quarter EBITDA decreased 5.8%, a result of higher than expected operating expenses, higher labor costs, and rising fuel prices, most notably in the month of June.

We experienced cost increases associated with hiring sales, delivery, and warehouse associates. Also, the vast majority of the overall increase in operating expenses are attributed to these short-term costs. We also continue to invest in our customer-facing technology, which will further enhance our customer experience.

We believe this is the right time to strategically invest in Performance Food Service to support future growth. Nearly two years ago, we made the important and strategic events in Vistar and they are clearly paying dividends. The labor market may remain challenging for the foreseeable, however, at PFG, we believe we have a good approach to address this area of our business as we move forward. We expect Performance Food Service to deliver mid-single-digit EBITDA growth in Fiscal 2019.

I want to thank all of our associates for their hard work and dedication over the past year. I'm proud to be part of such a great company that has so much potential for growth. We continue to be bullish on our growth prospects in the years to come.

We'd like to highlight one of our associates. This quarter, we are honoring a dedicated associate who is retiring this year at the age of 76. Faro Alibegovic has served as a highly skilled meat cutter with Performance Food Service Virginia for 16 years. His specialty has been tenderloins and fillets. So, if you've enjoyed from one of our customers along the Atlantic Coast in the past decade or so, you might want to thank Faro.

Faro is fluent in three languages and played professional soccer for both he Bosnia and German national teams. His motto has been strong like a bull and this sentiment embodies his commitment and tremendous work ethic that sets a great example for his colleagues and all of us at Performance Food Group.

We often say that PFG is a family company and in Faro's case, we meant it literally. His wife, Zenita, is also a meat cutter for the PFG family, and his son-in-law, Zifo, is a driver. Thank you, Faro, for your dedication and we wish you the best of luck in your retirement.

I will now turn the call over to Jim, who will discuss our fourth quarter results. Thanks, Jim.

James Hope -- Executive Vice President and Chief Financial Officer

Thank you, George, and good morning, everyone. Let me take you through our fourth quarter financial results, discuss the annual segment results, and then provide some detail in CapEx, cashflow, and return on invested capital. I'll wrap up with some detail regarding our Fiscal 2019 guidance.

Net sales grew 3.7% to $4.6 billion, driven by growth in Vistar, most notably in the theater and retail channels, case growth in Performance Food Service, specifically in the independent restaurant channel, and recent acquisitions. The increase in net sales was also attributable to an increase in selling price per case as a result of inflation and mix.

Overall food cost inflation was approximately 1.7% in the quarter, driven by eggs and seafood, offset by deflation in poultry and produce. Gross profit dollars improved over 6%. Gross profit per case increased $0.13, while gross margin as a percentage of net sales was up 30 basis points over the prior year period to 13.3%. The gross profit increase was fueled by an improved sales mix of customer channels and products primarily sold in the independent channel.

Operating expenses grew 5% in the quarter to $518 million. The increase in operating expenses was primarily due to acquired case volume, higher fuel prices, and acquisition integration costs within Vistar, as well as additional investments in sales and delivery personnel within PFS. The vast majority of the $25 million increase in PFG's operating expenses was driven by investments in sales, deliver, and warehouse associates, and higher fuel costs.

We've taken the opportunity to revamp and recharge our sales training program to fit today's environment and we're paying special attention to miles per route and opportunities to optimize fleet utilization. We believe the investments we're making will pay off and accelerate our independent case growth.

Operating profit was up 15.2%, driven by strong profit increase of 6.4%. Net income for the fourth quarter of Fiscal 2018 grew 59.4% year over year to $64.4 million. The growth was primarily the result of an increase in operating profit and a decrease in income tax expense, partially offset by interest and other expenses.

The decrease in income tax expense was primarily a result of the impact of the tax cuts and Jobs Act. The effective tax rate in the fourth quarter of Fiscal 2018 was 17.9% compared to 39.9% in the fourth quarter of Fiscal 2017. The decrease in the tax rate was due to a lower statutory tax rate, the impact of the rate differential for temporary differences, and the excess tax benefits associated with stock options exercised in the fourth quarter of Fiscal 2018.

Adjusted EBITDA grew 3% to $135.4 million. As George mentioned earlier, we're investing in our associates and investing for future growth. If you look at our fourth quarter two-year stack, adjusted EBITDA has grown 12.8%. Diluted EPS grew 56.4% to $0.61 in the fourth quarter of Fiscal 2018 over the prior period.

Adjusted diluted EPS increased 10.4% to $0.53 per share in the fourth quarter over the prior period. The increase in EPS was mainly driven by the $11.9 million net benefit to income tax expense as a result of the blended statutory rate for Fiscal 2.18 and the resulting rate differential related to temporary differences.

Let's turn to each of our segments, beginning with Vistar's annual results. Vistar had a robust year with net sales growth of nearly 11%, driven by broad-based case and sales growth, notably in the segments theater, vending, and retail channels and as a result of recent acquisitions. The box office continued to outpace expectations and drove our theater business. Vistar's full-year EBITDA increased 13.1%, driven by gross profit dollar growth of 18.4%. These increased were fueled by an increase in the number of cases sold and a favorable change in mix toward higher margin channels.

As we mentioned on last quarter's call, we expected to see some good momentum from the integration of CCI's acquisition. Our CCI integration progressed well during the fourth quarter and beginning in Fiscal 2019, we expect solid synergies from the transaction.

Moving to Performance Food Service, net sales increased 6.2%, driven by an increase in cases sold, including independent case growth and solid independent customer demand for Performance brands. For Fiscal 2018, independent sales as a percentage of total segment sales was up 100 basis points to 45.2%. EBITDA increased 3.3% for the full year.

Turning to customized, net sales increased 4.2% for the fiscal year. This decrease was primarily the result of the Georgia facility that was closed in the fourth quarter of Fiscal 2017 and the challenging casual dining environment. PFC Customized EBITDA increased 16.6%, driven by strong operating expense control and the favorable impact of closing the Georgia facility offset by higher transportation costs.

Let's turn to cashflow. PFG generated $367 in cashflow from operating activities, an increase of $165.3 million versus the prior year period. The improvement in cashflow from operating activities was largely driven by higher operating income, lower taxes paid and improvements in working capital. We also delivered free cashflow of $226.9 million, an increase of approximately $165.4 million.

We came in on the high-end of our revised range for CapEx and invested $140.1 million in capital expenditures, in line with capital spending versus prior year. Our return on invested capital significantly improved during the year. The increase was driven by strong operating profit, a lower tax rate, and strong cashflow, which was used to reduce debt. We're pleased with the progress and we'll continue to focus our attention on these important metrics.

Also, our net debt to adjusted EBITDA is at 2.8 times. We are very comfortable with our leverage and still see many opportunities in our M&A pipeline. For Fiscal 2019, we expect adjusted EBITDA growth to be in a range of 7% to 10% over Fiscal 2018 adjusted EBITDA of $426.7 million.

We expect that the 7% to 10% adjusted EBITDA growth for Fiscal 2019 will reflect first half growth in the low to mid-single-digit range. Second half adjusted EBITDA growth is expected to be in the high-single to low double-digit range. Fiscal 2019 first half growth is expected to reflect strategic investments in sales, warehouse, and delivery associates.

We also expect Fiscal 2019 adjusted diluted EPS to grow in a range of 10% to 16% to $1.72 to $1.82 over Fiscal 2018 adjusted EPS of $1.54. This outlook is based on the following annual assumptions. Organic case growth in a range of a 3% to 5%, interest expense in the range of approximately $60 million to $70 million and effective tax rate on operations of approximately 27% and capital expenditures between $170 million and $190 million with depreciation and amortization between $145 million to $155 million.

The Fiscal 2019 capital expenditures estimate is higher than Fiscal 2018 because of our ongoing investment to drive growth and the timing of certain projects. Now, I'll turn it back to George.

George Holm -- President and Chief Executive Officer

Thanks, Jim. We believe PFC is well-positioned for growth over the next several years and we are taking strategic actions in the face of certain short-term headwinds to fuel our performance. We have some near-term OpEx challenges. However, I don't believe they are structural in nature.

There is a highly publicized driver shortage in our country. We are working on attracting the right drivers. We had some early successes and plan to continue to be successful. Higher costs, including labor and fuel, were a headwind in the quarter. This will continue for the next two quarters, but it is manageable.

As we've previously discussed, we fell behind in hiring sales associates in the prior year and the early part of Fiscal 2018. As we ramped up our people investment in the fourth quarter, we believe this will help drive our continued market share gains and improve service in Fiscal 2019.

In summary, our associates are determined to provide the best customer experience and we believe we have the right strategies to deliver best in class service and sustainable annual growth. We're investing in people and technology and most importantly, investing in our customers so they can compete and grow and we remain committed to the M&A pipeline, potential acquisition opportunities in specialty still remain strong.

With that, we're here to take your questions. Thank you.

Questions and Answers:

Operator

At this time, if you'd like to ask a question, please press * then the number 1 on your telephone keypad. Again, to ask a question, that's *1. Our first question comes from the line of John Heinbockel with Guggenheim Securities.

John Heinbockel -- Guggenheim Securities -- Managing Director

Let me start, George -- independent case growth, maybe touch on the cadence as we've kind of moved from the fourth quarter into the first, and then at what point do you think -- the step-up that you've had in hiring here has been pretty substantial. When does that begin to impact independent case growth incrementally? Is it much stronger in the second half than the first half or not?

George Holm -- President and Chief Executive Officer

We expect that to be better in the second half than we are in the first half. Let me just give you a quick run through numbers. That was also a question that was also discussed on the last call. So, we were a week earlier in the fiscal quarter as you go back to May.

We had a tough fiscal third quarter, weather-related. We had an excellent April. I think looking back on that, part of that was just cabin fever. There are people there who spend a certain amount of money eating out. When they can get out, they get out. When the weather is bad, they don't.

We ended up having what we would call a somewhat mediocre Mother's Day. That seems to be a holiday that tends to be a record week every year, but tends to have less impact year to year in the last several years. We finish May out, what we would call OK. June was good and July has been better.

Now that we've hired people as part of it, we expect to get a good return from the people. We found more opportunity to get experienced people than we expected and we took advantage of that. We've had our issues from an expense standpoint. That would be the one area that was self-inflicted, and we feel confident that we'll be look back at the end of this fiscal year and saying that was a good decision.

John Heinbockel -- Guggenheim Securities -- Managing Director

And then maybe two things for Jim -- maybe talk about opportunities in the field, apart form the strategic investments you're making, to be making a little tighter on cost containment broadly and share best practices, and then in your DNA and interest guidance, I assume the DNA step-up is related to CapEx. The interest is because you ought to, I think, pay down debt this year. Does that reflect a big step-up in the rate on the ABL?

James Hope -- Executive Vice President and Chief Financial Officer

On the last question, it does not reflect a big step up in the rate on the ABL. Those things remain consistent. On the first question, on opportunities to improve operating expense, we're a solid food distribution company. We have many different operating companies. They all come up with great ideas and best practices. We're constantly talking about how we can cross-pollinate some of those best practices. We also do some really good work with our operating companies in regard to routing.

I mentioned route optimization. It's very important, and we know this, to pay attention to miles driven. We have a team that's always looking at how to help and support our operating companies in how they route their trucks. So, there are opportunities out there. We're optimistic about being able to find them and at the same time, we know that's very important to run the trucks, take care of our business, and take care of our customers.

Operator

Our next question comes from the line of Edward Kelly with Wells Fargo.

Edward Kelly -- Wells Fargo -- Analyst

Hi, guys. Good morning. I wanted to ask some questions about the investments that are taking place now. If we think about the last few quarters, you've been delivering fairly robust gross profit per case growth. Expenses have tracked a bit higher over the last few quarters.

I think one of the things, George, that we sort of sensed from you was you were a bit more excited about the idea that cost per case going forward could begin to improve. I think we're all OK with investing for growth. It's just harder to digest when it seems more like a surprise.

So, I guess the question I have for you is really, could you just take a step back for us and help us understand what sparked your strategic change around investment? How much of this is really proactive to drive growth versus reactive in a tougher environment? Does any of this at all relate to potential new business that's coming in?

George Holm -- President and Chief Executive Officer

Those are all good questions. Like I said, the sales part of it is something that's a decision that we made. We overshot the decision that we made. We found a lot of people available. I also have to say that that's not the biggest part of the issue that we're dealing with from an expense standpoint.

We typically have a flow of people as we go through the year. If you want to look at it through the fiscal year, Q1 tends to be our biggest hiring time. Our sales ramp up toward the later part of the month of August. We tend to grow our number of people in warehousing and delivery up until just before the holidays.

It tends to drop off after the holidays, comes back up again as we get into better weather and then as the season will change and the business comes maybe a week or two after Mother's Day, we run into a lower volume period of time and we typically adjust down our number of employees to that period of time. What we saw this year was we had issues getting the right number of people, getting the quality of people that we wanted. We begin to see that as the labor market became more difficult, the temp market became, for lack of a better way to put it, lower quality.

So, we made the decision not to let our number of people drift down and we probably overshot that as well. But as we went through the last half of May and particularly the month of June, we continued to hire to run the service levels that we wanted to run at a time historically where a number of employees were dropping. So, you kind of have that geometric progression there, where you've got expenses going up at a time they were going down the previous year. It helped our service levels. I think that it will prove to be a good thing for us, but definitely, it was problematic.

As far as business goes, we're trying to be pretty careful about talking about certain accounts for long periods of time, but we do have a fairly significant amount of business coming in in the month of September. The days where you could start hiring three or four weeks before that, train the people, they're ready to go when the account comes. That was probably a good route to go from about 2002 until maybe a year and a half ago, but you can't do that today.

You have to make sure you have experienced people. Our business is more systems-oriented. So, the training, the learning curve is a little bit more. You can't disappoint. You can't particularly disappoint customers immediately out of the chute when you start supplying them. I don't think I answered that, but go ahead.

Edward Kelly -- Wells Fargo -- Analyst

One of your competitors had problems with fill rates this quarter. How were your fill rates relative to your expectation?

George Holm -- President and Chief Executive Officer

Well, we didn't really have a big issue with fill rates. We had a few markets it wasn't what we felt it should be. We've had issues with not getting as good a fill rate from the supplier as we've had in the past and that's caused some fill rate issues. I couldn't say that's been a major issue for us. Our percentage of the cases that we fulfill at as high a rate as it was a year ago, two years ago.

Edward Kelly -- Wells Fargo -- Analyst

The last thing I wanted to ask you about on this topic is on the driver's side. When you talked about the things that you're investing in, the driver portion of it was mentioned last. Is the size of the cost around the driver's side reflective of that? Is that the lowest cost you're experiencing? Then generally, what are you seeing in the marketplace and what are you having to do on that front? Should we get a bit more concerned that that's just a multi-year problem that the industry has to deal with and it could potentially weigh on the cost of growth going forward?

George Holm -- President and Chief Executive Officer

Well, I think the labor issues that we have today are here to stay, at least in the near-term. I don't see anything that tells me that is going to lessen. A lot of publicity, a lot of air time around the driver's shortage -- I would say the shortage is getting people in my crew fairly equal. It just isn't to the extent of the expense that a driver is.

We've done a very good job, even in this fourth quarter, even within Performance Food Service of adjusting our margin mix to help us with these expense issues that we've had. I think we've don't enough of a job there that as things settle in even in the current environment, we'll be in a better position. I mentioned on the last call that Fiscal 19 will be less about margin growth for us, more about case growth and more about better expense ratios.

That's what we see through the year. I don't see the issues we're dealing with from a warehouse in transportation abating by the end of this quarter. I think we're going to have this for a while, but I think by the end of the fiscal year, we'll be glad that we spent the money to get the people on board and to retain those people.

Edward Kelly -- Wells Fargo -- Analyst

Great. Thank you.

Operator

Our next question comes from the line of Karen Short with Barclays.

Karen Short -- Barclays -- Managing Director

I had just two clarifications and then a bigger picture question. On July, your comment, George, was that July was better. Can you just clarify -- would that apply north of 6% in terms of independent case growth?

George Holm -- President and Chief Executive Officer

Yes, it would. I just want to repeat that that's one month, but we're feeling good and we feel like we'll get a return on the investment that we made in salespeople.

Karen Short -- Barclays -- Managing Director

Okay. Another clarification -- in terms of your guidance for the first half versus the second half, maybe this is just a function of top line, but all these new expenses that you've layered on, in my mind, they should cycle in the fourth quarter, not by the third quarter. I'm a little confused as to why these wouldn't be headwinds for the first three quarters as opposed to just the first half. Again, maybe that's a function of sales.

James Hope -- Executive Vice President and Chief Financial Officer

Yeah, Karen, you are correct. Some of it will last a little longer than others. Some of it is transitory. Some of it isn't. We know that we can manage down some of these costs as we level set on the right number of people, but we certainly wanted to make sure that we staffed correctly and were able to handle our customers.

Karen Short -- Barclays -- Managing Director

Okay. I guess bigger picture -- obviously, you gave us very significant details on the cadence throughout the quarter and into July. We know one of your competitors also experienced a slowdown. I guess the question is you didn't seem to necessarily benefit from their slowdown. Obviously, you did see a slowdown in your business. Is it more of a broad-based issue? Is it macro? Is it the competitive landscape? Is there anything that you can point to?

George Holm -- President and Chief Executive Officer

Yeah. I don't see it as a slowdown for the industry. Karen, I don't see it really as a slowdown for us. We had a tough quarter a couple years ago and I remember we had five issues that we had to deal with, a lot of issues to deal with. We dealt with them and made our way through it and came in where we were expected to come in and actually a little bit better.

We had five issues to deal with. I think here, what we're dealing with is just additional cost that we're experiencing in warehousing and delivery. Like I said, the sales is self-inflicted and we'll be happy we did that. I see this as really not revenue-related at all. I think if our expenses had grown more than our sales, but not to the extent that it did, we probably wouldn't even be talking about it. I don't really see it as a slowdown.

Karen Short -- Barclays -- Managing Director

Okay. Just last question -- you said that the M&A pipeline remains fairly robust. I'm just kind of wondering what you're seeing in terms of sellers expectations on multiples. Has the multiple expectation been raised, given the multiple that was most recently announced?

George Holm -- President and Chief Executive Officer

Yeah. I think it's too soon to tell with that. I think that was a unique transaction or potential transaction. I think there was some big scarcity value there. It was also large. So, I don't think for the most part people in our industry have the expectation level of when it was a fairly unique situation.

But I guess we'll really find out in the next few months. We've been active. We're confident that we'll continue about the pace we've been at as far as adding sales and EBITDA from M&A, but our biggest focus today, as it should be, is on fixing the labor issue and our organization growth.

Karen Short -- Barclays -- Managing Director

Thanks.

George Holm -- President and Chief Executive Officer

Thanks, Karen.

Operator

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

Vincent Sinisi -- Morgan Stanley -- Analyst

Hey, awesome. Good morning, guys. Thanks for taking my question. Just once again on the expenses -- it seems like the buckets, basically, were the op expenses, the fuel, and the labor. Just to make sure, labor, obviously, we're doing the most discussion on versus a quarter or two ago is it fair to say that maybe versus your estimation, then, that is the biggest divergence? Then George, I know you said you kind of had some trouble finding the right talent, at least earlier on. Has that been improving? Maybe any color on where those folks may be coming from, that would be great.

George Holm -- President and Chief Executive Officer

I'm not sure I can give you great color on where the folks are coming from. I would say with the labor issues, it appears as if they were sudden and just quick. I'm not so sure that's how things happen. I think that when you first run into these types of issues, you have a certain tolerance for less performance of the customer and maybe not the service levels that you want to have as opposed to a tolerance for any significant increase there would be in expense.

As you go through this for a period of time, then you just realize you've got to provide the level of service the customers expect and you want to grow. We've had a track record where we've had compounded EBITDA growth of 9.9% for ten years. The last two years have been 9.2%. We've always been mostly organic. 9.2%, probably not a lot to apologize for. If we can continue that, that's a very good thing.

If we don't make the moves that we need to make to be capable of continuing to put out those kinds of results, that is a very bad thing. We needed to get our service levels where they were at. I think the biggest impact we had was taking this trough of labor expense that we typically experienced through the year and leveling that off.

Like I said, it's kind of a geometric progression. You've got something going up that normally goes down. So, it doesn't have to go up much for it to look like it went up a whole lot. We work through that period of time. Like I said, we have business coming on. We'll see what the impact is then. We are going to provide our customers with the level of service they expect.

Vincent Sinisi -- Morgan Stanley -- Analyst

Okay. Maybe just as a quick follow-up just by customer type -- I know you said better July performance, but don't read a month into it, get that, of course, but just kind of longer-term, maybe not even just quarter specific, but do you still feel, I guess, first on the independent side that that kind of targeted 6% to 10% range, you feel good about that longer-term. Maybe quickly on casual dining -- I know last quarter, you said there was some improvement. It didn't sound like in the release that continued this quarter. So, any thoughts there would be great. Thanks a lot.

George Holm -- President and Chief Executive Officer

Yeah. Let me go through each one of those. First of all, from a mix standpoint, obviously, we want to continue to grow our independent business at a faster rate. We've done really well there, but we've had to really push hard and that's the way the business is. I think that by getting more people on board, stepping up the training that Jim mentioned, the mix of business will continue to help us. That is still the driver of our margin growth and our gross profit for case growth.

One of the reasons that I've discussed on the last call and brought up again that will be a bit more about expense management, ratio management, part of that is because we probably won't get quite as much benefit from mix because we do have business coming in. That is good business for us, well thought out, spent a great deal of time with the customer. That will help the bottom line at this company but will not be a contributor to increased mix.

Then as far as casual dining, you're probably right. It probably doesn't read that way. The numbers don't read that way that there would be improvement, but there is improvement. If you take our business for the quarter, once again, you back out the close down facility, which we won't have to do any longer. Then we had a bankruptcy that goes back to last January with Ignite. If you factor out their business, we're actually running some low single-digit growth. We see that as something that is better for us today. We had a fairly good customized June. We certain don't expect big earnings increases from that area, but we don't see it as the anchor that it has been for quite a while.

James Hope -- Executive Vice President and Chief Financial Officer

In our business as well, Vinnie, we continue to see the change in mix of business. Our older, higher penetrated, lower margin channels are not growing as fast as some of our newer channels that command a higher margin, a higher expense ratio as well, but higher margin.

Vincent Sinisi -- Morgan Stanley -- Analyst

Great. Thanks, George. Good luck, guys.

Operator

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

Judah Frommer -- Credit Suisse -- Analyst

Hi, guys. Thanks for taking my question. Maybe first, we're coming up on a year post investor day or analyst day. It sounds like any delta between the multi-year targets and what's going on currently versus next year is really operating expense. Can you just kind of confirm that? Is that the only thing that's really changed in your mind? The top line guide for next year seems healthy. So, I think it would help to have confirmation that the industry backdrop from a sales perspective is fine.

George Holm -- President and Chief Executive Officer

I agree with that. This is isolated to our operational expenses. By the way, not isolated to just Performance Food Service. We're experiencing that in Customized as well. We're doing the same thing there. We've added people to bolster our service levels. The only difference is the company has performed so well on the top line that you can overcome a lot with that kind of topline performance.

Judah Frommer -- Credit Suisse -- Analyst

That makes sense. Can you help us for next year with kind of puts and takes for high and low end of the EBITDA guide? At the high end, you'll hit that multi-year target at 10%, but what should we be thinking about? Are sales the biggest question mark, in your mind, or expense the biggest question mark between the 7% versus 10% growth?

George Holm -- President and Chief Executive Officer

Other than unforeseen loss of a customer, I kind of look at sales as the least of our problem. Would you agree with that, Jim?

James Hope -- Executive Vice President and Chief Financial Officer

Absolutely, strong sales.

George Holm -- President and Chief Executive Officer

Yeah. I think every company goes through ebbs and flows, somewhat easier times and somewhat more difficult times. We don't see our OpEx as something that's going to correct itself overnight. That's for sure. I don't know that I'd see it lasting until the fourth quarter, but I'm optimistic.

What we do have here is something that's very identifiable. We know what the issue is. We've made moves that we hope will correct it. But it's not structural and it certainly isn't sales and it certainly isn't margins. I've got a long history in this business. Sales have always been hard to come by and margins have been hard to come by. Expense ratios were almost taken for granted.

James Hope -- Executive Vice President and Chief Financial Officer

Yeah. I would reiterate what George said. We have very strong sales and we feel confident in our ability to continue to develop sales. We've invested heavily in what it takes to deliver sales growth. We have shown a track record of being able to manage margins and effectively manage pricing to the point that we take care of our customers and yet, deliver the margin growth we need.

Operating expenses, we clearly have an opportunity there to work and we have a plan and we're working on it and we want to manage operating expenses closely to make sure it's managed as an investment, not so much as an issue, but an investment from a position of strength so that we support the rest of the P&L as well as our customers. So, I feel good about where we're going to head. I believe we need to work through it across the next six months and we will.

Judah Frommer -- Credit Suisse -- Analyst

Okay. If I could sneak one more -- clearly, a lot of focus on PFS and Customized, but you had a great year in Vistar, which you mentioned. How should we think about lapping this great Vistar year next year?

George Holm -- President and Chief Executive Officer

That's a good question. We didn't recognize much of the synergies from the CCSI acquisition until we got to the latter half of Q3 and into Q4. So, we have a pretty good runway with that. Sales continue to be strong. We're seeing that in the month of July. I would characterize Vistar -- if you think about how I look at PFS today, that it's going to be more around case growth, less around margin growth, but better expense growth or less expense growth.

In Vistar, we're going to lap the sales from CCSI. So, we're not going to be running as robust a sales growth as we had been running, although our sales growth has been good without CCSI. We're also going to lap the expenses that we incurred from all of the movement of product around distribution centers and CCSI and you'll see better expense ratios develop in Vistar than we had in the previous fiscal year.

So, all in all, I would say still, what we consider to be good sales growth, not quite the margin growth that we've had in the past, past year, say, but better expense ratio growth as we get further into the year.

Judah Frommer -- Credit Suisse -- Analyst

Great. Thanks.

George Holm -- President and Chief Executive Officer

But our expense ratio control as we get further into the year.

Operator

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

Andrew Wolf -- Loop Capital Markets -- Managing Director

Hi, good morning. Just on the competition side, I want to be clear because Sysco ramped up and they're the sector leader -- it sounds like you're saying that is not causing you either material sales or gross margin response ratio? I just want to get a definitive sense of that.

George Holm -- President and Chief Executive Officer

No. In the past, they've always been a big competitor that typically grows. Presently, they are and I believe they will be in the future. So, not a lot changing there. I don't think that affects our world very dramatically.

Andrew Wolf -- Loop Capital Markets -- Managing Director

Great. Then on your labor issues, I also want to clarify for myself just sort of in absolutely dollars, is it more the pressure on the warehouse side -- the variance versus your expectations. You already mentioned the sales side. Is it more the warehouse side and you had to manage around quality of labor and so on or is it more on the trucking side where anecdotally, I'm hearing about big signing bonuses by competitors and stuff like that?

James Hope -- Executive Vice President and Chief Financial Officer

Yeah, Andy, if I were to rank them, I would go sales investment first and delivery and warehouse close second and third. I don't know if it was so much quality of worker. We are really pleased with the delivery team and the warehouse team we have. We have strong folks, well-trained, executing.

We just wanted to invest in more. It was about bringing on more, getting the trained, getting the ramped up. We believe we did it. I told you, we invested a little heavier on the sales side, probably heavier than we thought we would, but sometimes, that actually pays out well as the dusty settles. I think that's how I'd look at it, in that order.

Andrew Wolf -- Loop Capital Markets -- Managing Director

Okay. Just one big picture -- you all have a lot of experience, a lot of cycles. We've had low employment, unemployment rates before, but I don't think we've seen this wage cost ramp, at least in the industry. Can wage information be passed through in the industry's pricing? Has you seen that before? If so, what kind of lag is there?

James Hope -- Executive Vice President and Chief Financial Officer

Yeah. The market sets prices, to some degree. We look at our cost on two types of business. You have contract customers and you have independent customers. We're paying close attention to what is the right price for both of those. We want to make sure we're in market. I guess the answer to your question would be yes, it can be passed through and it has to be passed through carefully and fairly. I would stand on our results of strong sales growth and strong margin management.

Andrew Wolf -- Loop Capital Markets -- Managing Director

Okay. Thank you.

Operator

Our next question comes from the line of Karen Holthouse with Goldman Sachs.

Karen Holthouse -- Goldman Sachs -- Analyst

Hi, thanks for taking a question. It's actually focusing not on operating costs. Do you have an idea of what inflation expectations you have next year? It looks like there was a decent mis headwind looking at case growth and inflation growth versus revenue growth this quarter, how to think about what drove that and maybe those dynamics next year as well.

James Hope -- Executive Vice President and Chief Financial Officer

I'll take the first one. On inflation, I don't have a crystal ball. You probably expected me to say that, but based on what we've been saying in the 1% to 2% to 2.5% range in the past, I have no reason to believe that randomness of mix will make it fall out between 1% and 2% again and for the ongoing near future, probably the rest of the year. That can change. There are a lot of things that can have an impact on inflation.

As for mix of products and what we're working on, we believe we have room to penetrate in just about every product category. We're doing some exciting things on the protein side. We're working very hard there. We have a very skilled protein team. I think I'd leave my comment at that. There's room for us to grow in multiple probably categories. From a product mix shift, difficult to predict, but it typically and will most likely lead to good solid margins.

From a customer channel mix, we continue to invest salespeople, which drives independent case growth. As we've always said, we'll stay true to independent sales growth. It remains very important to us.

Karen Holthouse -- Goldman Sachs -- Analyst

Then also, trying to understand the pick up in DNA this year, which CapEx was a little bit higher in Fiscal 18, but still seems like a pretty big jump. How should we break that down into what DNA tied to equipment versus -- is there any amortization that's more related to M&A or the M&A pipeline there?

James Hope -- Executive Vice President and Chief Financial Officer

I don't believe there's a significant amount of depreciation, amortization related to the imminent pipeline. I don't have those numbers in front of me right now, but I would think current trends would hold.

Karen Holthouse -- Goldman Sachs -- Analyst

Okay. Thank you.

Operator

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

Kelly Bania -- BMO Capital Markets -- Analyst

Good morning. Just a couple more questions on expenses -- it sounded like sales was the main area of investment and then delivering warehouse number two, but can you just clarify are you making investments in the same number of personnel there and it's the cost of that that's higher or you're actually increasing the headcount in those areas. Then I guess not much quantification yet of the fuel expense and where that came relative to your expectations for the fourth quarter and what you're planning for in Fiscal 19 on that front as well.

James Hope -- Executive Vice President and Chief Financial Officer

Yeah. So, on the first one, we invested in more salespeople. I think we managed that well and we built a training program. We ramped up our training program. As we've been saying, we actually put more people on to the street selling. In regard to fuel costs, the fuel costs went up. Everyone in the industry saw it. Diesel prices accelerated.

We, like many companies, work very hard on appropriately hedging fuel costs and for the last several years, we've managed a fuel hedging strategy. We've executed well on the strategy and it balances the trade-off between accelerating costs and locking in a higher price in an unforeseen declining market so we don't get upside down on a hedge that doesn't work.

In our contract business, we have fuel escalation clauses. We do have a fuel surcharge. We have costs of scholars. In the end, our fuel expense was up 25% to 30%. That was buffered a bit from where it could have been.

George Holm -- President and Chief Executive Officer

Yeah, Kelly, this is George. Let me make a few comments on those costs for the new people. First of all, sales would be the most expensive. The big cost in sales, the short-term costs from the standpoint that in one part of our country, you're not going to get immediate productivity for those people and they come with a one-year no compete and it is expensive. It's worthwhile, but very expensive. So, it doesn't take as many people in the sales area to provide the type of cost. That's why Jim gave you that as the number one cost.

Then if you actually turn to people, we've been hiring more excess warehouse people than drivers. There's also a big difference between the two there. A driver is much more expensive to higher, higher compensated. The learning curve is greater. The systems are more complex. You're not going to get a payback on that person for a period of time.

When you get to a night crew, it's the one area where we are used to high turnover. The learning curve is very short. People can be productive within a matter of days. So, that would be the lower cost of those three. But it would actually be the most number of sheer people.

Kelly Bania -- BMO Capital Markets -- Analyst

Okay. That's helpful. I guess maybe can you help us understand what you're expecting in your guidance for fuel expense in '19?

James Hope -- Executive Vice President and Chief Financial Officer

Basing it off of what we've seen this year, I would expect fuel to continue to be high. I don't have any reason to believe it will go down. I'll leave it at that.

Kelly Bania -- BMO Capital Markets -- Analyst

One more from me -- George, you made the comment that Fiscal 19 was less about margin growth. I just wanted to clarify if you're talking about gross margins because the gross margins have been strong for a couple years now. Should we expect that a little bit more of that is going to be reinvested and do you think some of that needs to be reinvested to maybe drive a little bit stronger growth? I have one more -- within your guidance for Fiscal 19, what kind of case growth with independence is in your plan? Thank you.

George Holm -- President and Chief Executive Officer

As far as when I mentioned margins, it's always gross margin when I mention that. If it would be EBITDA margins, I would say EBITDA margins. So, that is definitely a gross margin. Like I say, year to year for us, our margins are more about our change in mix of business than they are, I would say, sheer price increases. We're certainly getting some increases due to the labor issues that people are aware of and, of course, many customers are aware of as well.

Then as far as guidance around independent growth, no different than it's ever been, really. We have that goal of staying above 6%. I can't remember, one of you guys probably know how many years in a row we've done that. I can't remember now. We do recognize that we'll take more people. We've made the investment that we needed to make to get that done.

Kelly Bania -- BMO Capital Markets -- Analyst

Thank you.

Operator

Our next question comes from the line of Chris Mandeville with Jefferies.

Chris Mandeville -- Jefferies -- Analyst

Hey, good morning. I'm just trying to square some comments that were made with respect to the cadence on the year. So, investment clearly in the first half of the year -- is the acceleration in EBITDA for the back half purely a function of moderating expense dollar growth or are you expecting some elements of acceleration on gross profit dollars as it was alluded to that you were picking up some incremental business.

James Hope -- Executive Vice President and Chief Financial Officer

It's simply the OpEx will begin to abate in the second half of the year. The part that isn't fixed will soften.

Chris Mandeville -- Jefferies -- Analyst

Okay. Then on the CapEx and DNA step up, what projects are the predominant drivers to that increase. Then just thinking about out years, is 1% of sales now kind of the new norm on CapEx going forward or is 2019 an exception?

James Hope -- Executive Vice President and Chief Financial Officer

Yeah. The type of projects are building expansions and fleet maintenance and equipment. I think in that 1% to 1.1% range of sales is probably the right way to think about CapEx.

Chris Mandeville -- Jefferies -- Analyst

Okay. Then the last one from me, just on the quarter itself, for Vistar specifically, the 6 basis points or so of margin expansion, I'm just surprised by the moderation relative to what we saw in Q3. I think George even referenced that you're starting to begin realizing synergies from your prior acquisitions. So, did I hear that correctly? If I did, what was weighing on profitability when you had that robust sales growth in the quarter?

George Holm -- President and Chief Executive Officer

You're talking about specifically within Vistar?

Chris Mandeville -- Jefferies -- Analyst

Correct.

George Holm -- President and Chief Executive Officer

We were operating seven of these CCSI distribution centers and a corporate office for CCSI through most of Fiscal 2018. By the end of the first half of Fiscal 2019, all of those would have been closed. The corporate headquarters was closed at the end of this fiscal year, so we just have expenses that are dropping off as we realize the synergies. That's one of the reasons I said we go into 2019, the expense ratio is going to be a big part of our story for Vistar.

Chris Mandeville -- Jefferies -- Analyst

Thanks, guys.

Operator

Our final question comes from the line of Ajay Jain with Pivotal Research.

Ajay Jain -- Pivotal Research -- Analyst

Yeah, hi. Good morning. I wanted to ask a question about bad debt expense. It sounded like you've cycled a customer bankruptcy earlier in the year. Is there anything of significance that you're seeing with that expense right now and based on the latest quarter?

James Hope -- Executive Vice President and Chief Financial Officer

No, you are correct. We cycled a Chapter 11 bad debt expense, but we don't see anything going forward that's any different than what we've experienced in the past. The climate is good and productive for us.

Ajay Jain -- Pivotal Research -- Analyst

Okay. I know you talked extensively about the investments in staffing. George, you mentioned that in some cases, you overshot and I wasn't sure that might be that you're now overstaffed in certain areas. In follow-up to an earlier question, I was also curious how much of the increase in headcount was a net increase in marketing associates, which would have been on top of replacement MAs that have left the business due to attrition. Can you give any color on the labor impact and how much of that is incremental in terms of the latest quarter and based on year over year comparisons?

George Holm -- President and Chief Executive Officer

Sure. When I said overshot, we just found more opportunity than we expected to as far as available people in the industry, particularly experienced available people. When those opportunities are available, for the most part, you need to take advantage of them. So, we ended up with a higher percentage increase in salespeople at the end of our fiscal year than we've experienced here, actually. We'll see that wane as we get further into the year and as we get these people productive. It should produce some good benefits. I'm not sure I got the other part of that question.

Ajay Jain -- Pivotal Research -- Analyst

Yeah. I guess more specifically, I was wondering if you could give a breakdown of how many marketing associates you might have had at year end and how that compares year over year and sequentially from Q3.

James Hope -- Executive Vice President and Chief Financial Officer

We don't provide that kind of information. I'm sure you can understand. Marketing associates are very important to us and we don't really want the details of that information getting out. We feel pleased about how we've hired and the kind of people we've hired and their future and we're optimistic about the results they can deliver.

George Holm -- President and Chief Executive Officer

I think Jim's comment that the hiring of salespeople was the biggest increase that we had in the OpEx, I think that tells you probably a lot right there.

Ajay Jain -- Pivotal Research -- Analyst

I just wanted to ask you finally as you're heading into Fiscal 19, it doesn't seem like the recent labor issues were necessarily a function of the competitive environment. It seems like it was mostly based on company-specific factors. Do you feel like the strategic investments are an ongoing process or is the ramp up in hiring pretty much behind you at this point?

James Hope -- Executive Vice President and Chief Financial Officer

I believe the ramp up in hiring is behind us. We're at a level we can manage now. I think we'll maintain a right level. We'll see a little decrease. We'll become much more efficient as well, while we're at it.

George Holm -- President and Chief Executive Officer

The other important part of that equation is when you're running that kind of increase in people in both delivery and warehouse, the big key is to get them to your company's typical productivity levels. That's when you get your pay back. We're not sitting at that point today. That's probably the unspoken part of the biggest challenge that we have is we also need to get these people to the level of productivity that we've become accustomed to.

Ajay Jain -- Pivotal Research -- Analyst

Thank you very much.

Operator

At this time, there are no further questions. Are there closing remarks?

George Holm -- President and Chief Executive Officer

Great, everybody. Thank you so much for your time and thanks for the questions.

Operator

This concludes today's conference call. You may now disconnect. Have a wonderful day.

Duration: 62 minutes

Call participants:

Michael Neese -- Vice President of Investor Relations 

George Holm -- President and Chief Executive Officer

James Hope -- Executive Vice President and Chief Financial Officer

John Heinbockel -- Guggenheim Securities -- Managing Director

Edward Kelly -- Wells Fargo -- Analyst

Karen Short -- Barclays -- Managing Director

Vincent Sinisi -- Morgan Stanley -- Analyst

Judah Frommer -- Credit Suisse -- Analyst

Andrew Wolf -- Loop Capital Markets -- Managing Director

Karen Holthouse -- Goldman Sachs -- Analyst

Kelly Bania -- BMO Capital Markets -- Analyst

Chris Mandeville -- Jefferies -- Analyst

Ajay Jain -- Pivotal Research -- Analyst

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