Performance Food Group Company (PFGC) Q3 2021 Earnings Call Transcript

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Performance Food Group Company (PFGC 0.17%)
Q3 2021 Earnings Call
May 5, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to PFG's Fiscal Year Q3 2021 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.

Bill Marshall -- Vice President of Investor Relations

Thank you, Laurie, and good morning. We're here with George Holm, PFG's CEO; and Jim Hope, PFG's CFO. We issued a press release regarding our 2021 fiscal third quarter and first nine months results this morning, 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 same period in our 2020 fiscal third quarter and first nine months. Additionally, occasionally during our call today, as noted, we are comparing results to the same period in our 2019 fiscal third quarter and first nine months. 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 at the back of the earnings release. 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.

George L. Holm -- President, Chairman & Chief Executive Officer

Thanks, Bill. Good morning, everyone, and thank you for joining our call today. It is my pleasure to discuss PFG's third quarter financial results with you this morning. It is an exciting time for our company and industry with increasing confidence that recovery is taking hold. We're excited to see more and more of our business grow above and beyond 2019 levels. As we reflect upon what the past 12 months has brought, I could not be more pleased with how far our organization has come and how well we have responded to the market challenges. Over the past year, we have made strategic investments in our business despite a tough operating environment, including retaining our sales force. I am pleased to say that these investments have paid off reflected in market share gains, particularly in the independent restaurant business and sales growth.

The progress we made would not be possible without the strong partnerships with our customers and suppliers and, of course, our service-minded associates. Although it has been a difficult time for restaurants, many of them have not only survived, but are looking forward to a stronger business in the months and years ahead. The resilience of the restaurant industry has been something to watch and we are proud of the role we play in the food supply chain. Let's begin by discussing some of the dynamics of our third fiscal quarter. As you know, we lapped the Reinhart acquisition in January, and we're comparing against a very strong start to calendar 2020. Also, several of our markets, particularly in Texas and other areas of the Central U.S. experienced severe winter weather, which temporarily shut down the ability to ship product and kept many individuals at home.

While this created a difficult February, the restaurant business picked up significantly in March to finish the quarter strong. Also, while we are beginning to see some improving trends at Vistar, many of the channels they serve are still under pressure, but we do expect those channels to eventually move into recovery mode. Nonetheless, we posted a record quarter with over $7.2 billion of total net sales. In fact, during the last two weeks of March, our dollar sales were larger than they have ever been and that continued into April. The last seven weeks are the seventh highest sales weeks we have experienced ever. We are encouraged by the number of markets that are growing the business compared to 2019 results. Our independent restaurant business continues to be a highlight for the organization. During the third quarter, our independent case sales were up 6.3% with considerable improvement late in April and early May. We have consistently increased share in this important channel.

And are now working hard to retain these gains. As you know, the mix shift of our business to independent restaurants from chains had a positive impact on our gross margins. Our chain business skews toward the casual dining space, which has been slower to recover. With that said, we are seeing encouraging signs that many of the casual chains we do business with have seen a pickup in demand. We are prepared for a potential strong recovery in chains which, at some point, may outpace the growth of independent. With that said, we are not seeing that at this point in time as a combination of our independent restaurant mix and market share gains in that channel had driven strong performance. The recovery of Vistar is moving forward, though at a slower pace than Foodservice as expected. There are bright spots within this business, including convenience stores, retail, value stores and corrections. These channels have somewhat offset sizable declines in our theater and office coffee service businesses.

And we're beginning to see signs of improvement as movie theaters begin to slowly reopen. We are cautiously optimistic that this business will continue to make headway. Similarly, as some workers begin to return to offices, we expect to see some improvement in our office coffee business. However, the prospect of a continued environment of work from home could keep this business below 2019 levels for some time. Importantly, however, we believe that Vistar still has a bright future even if theater and office coffee do not fully recover. In fact, some of our businesses like micro markets and micro kitchens may benefit from different work patterns over the long run. Our top line recovery is exciting, but does require investment to support the business momentum. For example, we accelerated the pace of hiring, particularly drivers and warehouse workers.

We also continue to support our sales force, which is an integral piece of our ability to gain share, grow our business and generate profit over the long term. With the sales recovery, we have also accrued bonus expense during fiscal 2021. We are purposefully staffing our business to support our growth profile and prepare for success in the coming fiscal year when we expect a more normal operating environment. Simply put, we are investing in our organization today to support the ability to generate higher sales and profit in the future. Jim will provide even more color on our cost items in a moment. The strong sales recovery also puts the supply fill rates under pressure. The labor headwinds that I just mentioned for our business are being felt by companies across the supply chain from manufacturers to restaurants.

Through this environment, our suppliers are working diligently to fill demand. On each of our quarterly earnings calls, you have heard us discuss the integration of Reinhart, which has met or exceeded our original expectations across the board. We remain incredibly pleased with how the Reinhart organization has become a part of the PFG business. Let's now move to more recent trends, including an early look at the fiscal fourth quarter in April. As you know, in late March, we began lapping the shelter-in-place orders from 2020. As you'd expect, our dollar sales growth year-over-year quickly moved into the triple-digit percentage range. We believe it is more instructive to look at our current trends compared to 2019 to get a clear picture how the recovery is progressing. In this analysis, we have included Reinhart and Eby-Brown pro forma results in the 2019 results.

We are pleased to say that both our legacy Performance Foodservice and Reinhart segments' pro forma dollar sales turned to positive growth versus 2019 in the third week of March and have remained positive since. In April, pro forma dollar sales for Performance Foodservice and Reinhart accelerated to higher levels of growth compared to 2019. Vistar has not seen the same level of recovery but saw dollar sales essentially flat in April compared to 2019, including Eby-Brown. Keep in mind that these results are in spite of the fact that many markets have retained restrictions or are just beginning to return to a somewhat more normal operating environment. As I mentioned earlier on the call, we are investing to support this growth and are pleased with how our organization is situated for a full recovery.

Before turning it over to Jim, I want to highlight how PFG associates go above and beyond their day-to-day business activities to get back to the community. In February, PFG worked with World Central Kitchen to supply food for Kids' Meals Inc., a Houston-based nonprofit organization serving preschool children facing hunger due to property. With PFG support, World Central Kitchen was able to provide 42,000 meals following the destructive winter storms in Texas. In addition, PFG made a $50,000 donation to further support the work, providing nourishing meals for the community's need. PFG proudly continues to focus efforts beyond our core business dynamics to support ways that we can help the communities we serve. With the generous spirit of our associates across the country, I look forward to sharing more of our company's good work in the months and years ahead. With that, I'm going to turn things over to Jim, who will give you more detail on third quarter and financial position.

James D. Hope -- Executive Vice President & Chief Financial Officer

Thank you, George, and good morning, everyone. Before I review our results for the third fiscal quarter, I'd like to discuss some of the larger financial items impacting our business. As George mentioned, with our strong sales recovery, we have also seen the impact of higher labor costs as we rebuild our organization and are impacted by the effects of a tight market, particularly for drivers. These items are certainly not unique to PFG nor are they new to our industry. Driver supply and wage inflation has impacted distribution businesses for many years. However, today, there is demand for these workers from businesses around the country who are building their workforce up to pre-pandemic levels. We also continue to support our sales force as we have throughout the pandemic and with better sales results come higher compensation expense, a trade-off we are more than happy to make.

Last year, we also recorded a bonus reversal as our organization has continued to perform well through the pandemic, we have now been accruing bonus expense since the beginning of the fiscal year, which produces a contrasting year-over-year operating expense comparison in the most recent quarter. Specifically in the third quarter of 2021, we had approximately $30 million of bonus expense compared to a $32 million benefit in the year ago period. We believe that supporting a strong workforce is an important element of our growth strategy and a necessary ingredient to retain the market share we have picked up. We will remain diligent around costs, particularly those that did not impact our customer-facing activities. Still, we would expect the workforce rebuilding efforts to support sales results at or above 2019 levels in the coming quarters.

We're proud of how our organization has managed the labor situation and believe it has positioned PFG for long-term success. I'd also like to address our working capital and liquidity position. We exited the fiscal third quarter with a strong balance sheet. In fact, despite paying off the $110 million 364-day term loan, our total liquidity improved to $2.1 billion to end the quarter. This was the result of solid operating results, working capital management and an increase in our borrowing base. During the quarter, accounts payable improved, partially offset by an increase in our inventory and accounts receivable due to increased business activity and order flow from customers. We are also seeing improvement in the aging of our accounts receivables, which we believe reflects a better financial position and outlook for many of our customers. In total, cash flow from operating activities was $173.3 million in the first nine months of fiscal 2021. The strong improvement was driven by an increase in cash flow from operating activities.

This was largely due to improvements in working capital and income tax refunds of $117.8 million, partially offset by the $117.3 million contingent consideration payment related to the acquisition of Eby-Brown. In the first nine months of the year, PFG spent $118.9 million in capital expenditures, which was an increase of $17.8 million versus the prior year. This spending was largely to support our future growth, particularly through adding additional capacity to our warehouse space. In the first nine months of fiscal 2021, PFG delivered free cash flow of $54.2 million, an increase of approximately $137.7 million versus the prior year period. Now with that, let's move to a quick overview of our results for the third quarter. Total case volume decreased 4.2% in the third quarter compared to the prior year period, with volume declines in the chain business and Vistar partially offset by gains in independent cases.

As George mentioned, independent cases were up 6.3%. This is a particularly strong result as much of the quarter was comparing to a strong January and February of 2020. On a consolidated basis, net sales grew 2.9% in the third quarter to $7.2 billion. Overall, cost inflation was approximately 3.5% in the third quarter, driven by disposables and poultry. Please note that our inflation calculation now includes both Reinhart and Eby-Brown. As we discussed last quarter, we've experienced higher rates of inflation of late, particularly in the Foodservice segment. This accelerated sequentially from 2Q '21 into 3Q '21. And at this point in time, we are confident in our ability to pass inflation on quickly without any major disruption to the business. Gross profit for the third quarter increased 3.1% compared to the prior year period to $832.7 million.

Gross profit per case was up $0.37 in the third quarter versus the prior year period. Gross profit margin as a percentage of net sales was 11.6% for the third quarter compared to 11.5% for the prior year period. In the third quarter, PFG had a net loss of $7.6 million, adjusted EBITDA declined 7.6% compared to the prior year period to $121 million. Diluted loss per share was $0.06 and while adjusted diluted EPS was $0.19 in the third quarter. As you may have noticed in our earnings release this morning, we reestablished guidance for the final quarter of fiscal 2021. We currently expect fiscal fourth quarter net sales to be at least $8.2 billion, with adjusted EBITDA of at least $185 million.

Note that these numbers include a 53rd week, which occurs in the fiscal fourth quarter. In summary, we're very pleased with the recovery our business is experiencing, and our recent sales trends have exceeded our high expectations. We will continue to appropriately invest in our business, particularly in our workforce to put our company in a position to continue our sales momentum throughout the recovery period. The labor market remains tight and companies across the supply chain are looking to add and retain high-caliber associates. This will likely continue to keep our personnel-related operating expense slightly elevated. Our independent restaurant business once again outpaced the overall market and turned to growth by the end of the quarter. Even more impressively, our top line results are beginning to exceed 2019 levels despite continued marketplace restrictions.

As George mentioned, we are very pleased with April results, which increases our confidence that a strong recovery will likely continue. Vistar is seeing signs of improvement in their channels even with the harder hit areas of theater and office coffee. We still expect a slower recovery at Vistar, but continue to expect growth as the post-pandemic environment develops. All of these areas are supported by our strong liquidity and working capital position, and we are committed to running our business for long-term success and feel that we have the people and the financial flexibility to do so. We are very proud of how our organization and our associates have performed, and it is their hard work that we believe has gotten us off on the right foot in calendar 2021, setting us up for a very solid fiscal 2022. We appreciate your interest in Performance Food Group. And with that, we'd be happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of John Heinbockel of Guggenheim.

John Edward Heinbockel -- Guggenheim Securities, LLC -- Analyst

George, let me start with -- can you touch a little bit on the growth on the independent side. Growth in new accounts, growth from existing accounts and then the existing accounts, is that more lines per stop? Has that begun to recover it's volume per line?

George L. Holm -- President, Chairman & Chief Executive Officer

Yes. Well, if you look at our independent growth, first of all, if you look at April and you look at a 2-year stack, we're actually growing much over our normal levels. And I think a lot of that was that we were in good shape going into the pandemic, and I think we did a good job of picking up accounts during the pandemic, particularly for some reason, early in the pandemic. Our growth, if you had to kind of look at where it's been coming from, certainly, the greatest strength is in existing accounts with both growth in number of lines and growth in number of cases and ironically, growth in number of cases per line item. That may have something to do with heavy takeout and reduction in menus, it's kind of hard to tell. We're doing well with net new accounts. I think that, that is very much a market-by-market development.

We feel that there's been significantly more accounts closed in the Northeast than the rest of the country. And then parts of the West, we see more closures as well, particularly in California. So it really varies by market, but we're just real pleased with how we're doing at the account level. That is what's really driving our growth.

John Edward Heinbockel -- Guggenheim Securities, LLC -- Analyst

And I know with COVID, one of the things you learn right is that your salespeople have more capacity. But if you think about the recovery progressing faster than you thought, how comfortable are you with the capacity they have? And do you feel a need here in the near term to step up sales force hiring?

George L. Holm -- President, Chairman & Chief Executive Officer

We've already stepped up the sales force hiring. We stepped it up a good bit in February and in March. We're at all-time highs in sales per salesperson. We like that because they make a better income and it makes for more loyal salespeople, and it's just good all the way around. But we do recognize that we have an opportunity to grow faster than we have in the past, and we want to make sure we have the people to support that growth.

John Edward Heinbockel -- Guggenheim Securities, LLC -- Analyst

And then just lastly, right? So normally, I think you'd grow your sales force, right, 3% to 4%. Is it sort of back to that level? Or do you -- are you going beyond that?

George L. Holm -- President, Chairman & Chief Executive Officer

No, it's back to that level.

John Edward Heinbockel -- Guggenheim Securities, LLC -- Analyst

Thank you

George L. Holm -- President, Chairman & Chief Executive Officer

Thanks John

Operator

Your next question comes from the line of Alex Slagle of Jefferies.

Alexander Russell Slagle -- Jefferies LLC -- Analyst

Thanks. Good morning. I wanted to follow up on the independent business. And if you could kind of talk to how you think you're gaining wallet share with the existing customers and perhaps really thoughts on their propensity to either trim or expand the number of distributors they buy from as supply chain challenges and driver shortages could be to some of smaller distributors and suppliers may be coming up short on inventory and ability to deliver as we look forward?

George L. Holm -- President, Chairman & Chief Executive Officer

As we saw this developing last year where we were -- our salespeople are doing a good job of getting new accounts and getting a bigger piece of the accounts we had, I will tell you, I did worry a good bit that this is a temporary phenomenon and certainly, we wanted shelter-in-place to be as short as possible. And here we sit where it's still somewhat in effect. I think when something's happened for 13, 14 months, I worry the customers would kind of go back to their old ways, their old habits, and that is their habit now. It's been a long time. And I'm confident that we'll do a good job of holding our position in these accounts. Certainly, there's the possibility of people introducing more, I guess, I would call it, competitors into the account. But we haven't seen that so far. And I just don't see a reason for there to be any drastic change to the marketplace.

Alexander Russell Slagle -- Jefferies LLC -- Analyst

Okay. And on Vistar, just wondering if you could comment a little bit more on some of the underlying dynamics there. And two things specifically, just curious how the supply chain issues broadly have impacted your infill rates there? And then any comments on how you're investing ahead of maybe some expected acceleration in demand in the back half of calendar '21?

George L. Holm -- President, Chairman & Chief Executive Officer

Yes. Well, Vistar, obviously, has been much, much heavier impacted. It's also been heavier impacted from an inbound supply chain. Our service levels, which were typically mid- to high 90s inbound from our suppliers is actually in the 80s. It's incredible the difference. If you think about that, we haven't had anywhere near that kind of effect in our Foodservice business. But our Vistar business is a branded business, and they're mostly big CPG companies. And they've been very, very busy with retail. It's also impacted to some degree our third quarter earnings, it's typically a good quarter for Vistar, but we also have a lot of promotional activity that happens at the end of December. From our suppliers, we recognize that income in January, early February as we're selling the product. But those companies were not looking for additional volume.

As they got close to the end of the calendar year, they could barely keep up with what they were producing. And as far as investing, I feel real good about Vistar, extremely good. It's been our flagship company for a long time, and I still consider it to be. Those channels will come back. I think that there's a chance that office coffee won't come back to size it was before, if there's more work from home. And I think we need to see with theater, although there's so much product or movies that haven't been released and they keep getting delayed that we're going to get hit with blockbuster after blockbuster. And I think when people are comfortable to go back to theaters, I think the theater area is going to do real well. The other channels that we have are all doing fine, where I see great potential is that we've picked up a good bit of new value store business that actually started this week.

It comes on bit by bit, I guess, but every week for about, I think, it's a 5- or 6-week period of time, it will be fully in place. That's going to be a big help for Vistar. We did have some suppliers that, albeit, kind of small that didn't make it through this. So that will be helpful for us. And I just see nothing but opportunity. It's a great channel.

Alexander Russell Slagle -- Jefferies LLC -- Analyst

That's great. Thank you.

Operator

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

Edward Joseph Kelly -- Wells Fargo Securities, LLC -- Analyst

Hi guys, good morning. I wanted to just follow up on guidance and particularly sort of as it relates to current trends, and just kind of understand what's baked in. So if I look at your third quarter sales and I'm trying to back into this. But I think maybe third quarter sales were about 3% or so below pro forma 2019 sales. It sounds like April is up. But then as we think about Q4, backing out the extra week, I'm not so sure that I get up. So I'm just -- I'm having a hard time with this. So your guidance, excluding the extra week, what does that imply for Q4 versus pro forma 2019?

James D. Hope -- Executive Vice President & Chief Financial Officer

Yes, it implies an improved Q4. Look, we saw a really strong April, and we're -- we wouldn't have commented on it if we hadn't. And that momentum in April gave us the confidence to put in at least guidance number at a time where I think there's a whole lot of uncertainty in the entire marketplace, we have the confidence to put a floor in. I will say that we'll watch each week develop. And as the quarter progresses, we may -- we'll continue to take a look at how the business is performing.

George L. Holm -- President, Chairman & Chief Executive Officer

Yes. I'm going to comment a little bit more of it, but I want to take a little caution with it. As you can imagine, we spend a lot of time talking, I will give some form of guidance or not give guidance. But really, you're 5.5 weeks into it by the time we have this call. Our April was extremely strong. And you have to look at that in a lot of different ways. And people who were getting their vaccines, they were anxious to get out for a first time. The restaurants in a lot of markets are full or full to the capacity that they can be. And in my discussion with customers, they are not seeing their takeout business slow down. We are not seeing our sales of disposables for use in takeout slow down.

So I think that we needed to be cautious that this could be a little bit of a positive bubble. Now that may sound strange to say when there's still markets that have restrictions. But If you think about a restaurant being at 75%, I mean how many hours a week is a restaurant above 75%, right? And I think customers today are more willing to take an earlier reservation or a later reservation than normal. The expectation level is a little bit different. And we were cautious around what we're looking at for top line.

Edward Joseph Kelly -- Wells Fargo Securities, LLC -- Analyst

That's helpful. And then the other thing I wanted to ask about top line, is there potential for some negative mix components? Like if I think about your case growth relative to your sales growth, your sales growth has been outperforming. Does any of that reverse? Or does that sustain itself? I'm just curious as to how we think about modeling sales on that.

George L. Holm -- President, Chairman & Chief Executive Officer

Yes. Well, in our company, a sale is not a sale, they're all so different, right? I mean the case cost differences are huge, and then we have this component where we have to sell cigarettes to be in the convenience business. That's a whole different story where it's profitable business, but it's extremely low return on sales. So what I can tell you is that across our entire business, our gross profit per case is at all-time highs. We are doing extremely well on our gross profit per case. Now we're also -- for whatever reason, we're also doing very well on high case cost items. One being that, unfortunately, people are smoking more. And I think it's just a -- there's more opportunity to. They're not in the workplace where it's restricted. Our cheese sales are exceptional. Our center-of-the-plate sales have been a higher percentage of our sales than normal. So we always, as a company, for a long time, when we look at gross profit, we look at gross profit per case and then we make sure we look at margin before we have this call. I don't really want to comment on where our margin is headed, but we feel very good about our gross profit per case.

Edward Joseph Kelly -- Wells Fargo Securities, LLC -- Analyst

All right. And then just the last one for you was on the cost side. You did mention cost on the driver side and warehouse worker side. And I know you don't want to sort of say where you think EBIT margins could go over time. It does seem like they can go higher, though relative to your pro forma '19 number, just given everything that's happened. Is there anything you're seeing in the inflationary side on the costs that you think would prevent that?

George L. Holm -- President, Chairman & Chief Executive Officer

Well, no, there's nothing I see that prevents the EBITDA margins to improve. But I got to make this comment is as we move forward as a company and what our goals are and the things that we want to get accomplished are more around increasing profitability, increasing our return on capital, and EBITDA margin is not a big focus for us because it shouldn't be. It's not the right way to run the business that we put together. So if there's significant changes in product mix that could affect our EBITDA margin, but I think that all things being equal, I believe it will continue to go up. And if you really look at our third quarter, even though if you're looking at EBITDA margins, it wasn't stellar compared to the past, but our EBITDA margins have gotten significantly better in Foodservice, particularly in broad line.

Reinhart is performing extremely well, getting close to actually the growth rates of Performance Foodservice. And Vistar -- legacy Vistar was always our highest EBITDA margins. And needless to say, that's been heavily impacted. And as far as expenses going forward, I don't expect to have problems. I don't think we have comp issues whenever -- because we address those, we've learned, we address them as soon as we think it's a problem. We keep very close track of where we're at versus the marketplace from a competitive standpoint when it comes to comp. $15 an hour would have really virtually no effect on us. But I also believe that right now, today, we can't have too much inventory. We can't have too many drivers, and we can't have too many warehouse people and that for us to continue to build the sales that -- where we want to get them and the profitability that we want to get, we've got to have the people today.

And I do believe that as we get to fall, it's going to be easier to get people. There's a lot of contributing factors right now, but we feel like we're in a position to attract good people. We just have to find them.

Edward Joseph Kelly -- Wells Fargo Securities, LLC -- Analyst

Make sense. Thank you.

George L. Holm -- President, Chairman & Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of John Glass with Morgan Stanley.

John Stephenson Glass -- Morgan Stanley -- Analyst

Thanks and good morning. My first question, these are both expense questions. My first question, Jim, is just on the OpEx line. Have you been including bonuses at this level all year, and we're just hearing about it? Or is this a catch-up to some degree? And what I'm really trying to understand is if you exclude the bonus payment, the reversal, if you will, how much is underlying OpEx growing? Are you seeing some pressure, transient pressure from that hiring? Maybe just talk about what the underlying expense trends are excluding those balances.

James D. Hope -- Executive Vice President & Chief Financial Officer

Yes. The first part of your question is we have been accruing at this rate all year. The difference is we ran up against the adjustment of the reversal last year in March in Q3. So that's the reason it triggers a comment. That hadn't happened until March last year. So that takes here that question. When you think about opex, look, the main driver of our increase in opex in the quarter was an increase in labor, particularly drivers. As we'd anticipated, as volume began to recover, we needed to restaff the areas of our workforce that we had pulled back on. So if you look at personnel expense sequentially from 2Q '21, we were up in driver costs, warehouse costs, sales comp and bonus expense. And I'd say no one item was particularly large quarter-to-quarter, but they added up to the increase you saw in 3Q '21 with the bonus.

So keep in mind on that, look, we're building a cost base ahead of the sales recovery on purpose so we can take care of our customers. And if you add in Reinhart and Eby, our 3Q opex was below 3Q '19 opex. If you look at our expectations for Q4, we definitely aspire to be above 2019 sales levels fairly soon as we mentioned, and we need the workforce and the infrastructure to support that.

John Stephenson Glass -- Morgan Stanley -- Analyst

Thank you for that. And could you just maybe a word on the role of inflation in the gross profit? As we start to see inflation come up, are most of your contracts sort of penny profit driven such that inflation might actually drive down gross profit even in the gross profit dollars and sales? How should we think about both margin and this more inflationary environment for you?

James D. Hope -- Executive Vice President & Chief Financial Officer

Yes. And a good piece of our chain business, it's such that we'll see a little bit of margin rate erosion, but we'll sustain our margin dollars. On our independent -- our independent business, we'll do well, and we'll be able to pass it through fully. Either way, from a margin dollar standpoint at the inflation rate we're seeing right now, it's not unusual. And it's not really a challenge for us at all, and we'll manage through it like we always have.

John Stephenson Glass -- Morgan Stanley -- Analyst

If I could ask just one final. You mentioned your vendors having challenges with their labor. What's the risk you actually can't get available inventory? Is there a risk that's actually like your fill rates become lower because of this? Have you experienced that? Or is that just something you're flagging its potential for the next couple of quarters?

George L. Holm -- President, Chairman & Chief Executive Officer

Well, our fill rates are below normal rates now. And it hasn't been a big issue, whereas the biggest issue is customers actually that our chains, and we have 100% of the business that we have for a long time, and they'll pick up the phone and call and say, what's going on? What's happened to you? When you get out in the independent world, they're experiencing other people as well. And they know the issues that exist in the supply chain. But what I see other than if you get a place shut down because of a COVID issue, it's getting better and it will continue to get better.

One thing we learned from this is that our industry was finally tuned, and we've got a lot of perishable product and we would turn the inventory extremely quick, and our suppliers were quite reliable, and we were threading the needle kind of all the time. And a real mature supply chain like that doesn't come back overnight. And I see our suppliers getting better and better. We are running higher inventory levels than before because we understand the issues they're experiencing. And they're having the same problem getting people, which, like I said, I'm just a believer that that's going to alleviate as we get into the fall. And I don't see it as a long-term problem. It's just something that, as an industry, we just have to fight our way through and get back to some sense of normalcy.

John Stephenson Glass -- Morgan Stanley -- Analyst

Thank you.

Operator

Your next question comes from the line of Lauren Silberman of Credit Suisse.

Lauren Danielle Silberman -- Credit Suisse AG -- Analyst

Thanks for the question. Just a follow-up on the independent case growth piece. Are you willing to share what percentage of independent customers you're serving today relative to pre-COVID? And then if you're starting to see the appetite for new unit growth in the space increasing? Then as it relates to wallet share, how is your wallet share penetration among existing independent accounts compared to new accounts that you've brought on?

George L. Holm -- President, Chairman & Chief Executive Officer

Well, our wallet share in existing accounts, it has done nothing but increase since. It's our -- probably our brightest spot, net increase in new accounts in independent. We're doing well. We're probably -- we're just a little better than mid-single digit, which we think is a real good number. It's serving us well with the kind of growth that we're getting right now. And I think I missed one part of your question, if you could remind me.

Lauren Danielle Silberman -- Credit Suisse AG -- Analyst

Sure. Looking at the wallet share, the penetration among existing accounts, how that compares to new accounts? So whether new independent accounts you brought on, the wallet share penetration is lower than what you're seeing with your existing customers?

George L. Holm -- President, Chairman & Chief Executive Officer

Our average sale per customer is the best it's been. So we're seeing really good growth in existing customers. I really couldn't tell you how that compares to the size of our new accounts. But in totality, our bright spot is that we're selling more to existing customers.

Lauren Danielle Silberman -- Credit Suisse AG -- Analyst

Great. And then just another one on inflation. Can you share what you're seeing on inflation in the fourth quarter? And then what level of inflation do you feel you're comfortable to pass on to customers as you think about the potential for accelerating inflation?

James D. Hope -- Executive Vice President & Chief Financial Officer

Yes. No real change in the early phases of Q4 from what we've talked about. We see the continued momentum that we had in Q3 in inflation. I'm not sure I want to get into hypothetical scenarios, talking about how much inflation we can pass on, but I can tell you this. At a 3.5% level of inflation, that is not a challenge to pass on at all. Our salespeople are doing an amazing job, working with customers, helping them understand what's going on and they can certainly do something somewhat north of that.

George L. Holm -- President, Chairman & Chief Executive Officer

Yes, and those decisions are made by our salespeople. So we don't have kind of a big answer for that. It's really a whole bunch of little answers that they're out there getting every day.

Operator

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

Kelly Ann Bania -- BMO Capital Markets Equity Research -- Analyst

Hi good morning. I just wanted to clarify another point on the guidance for the fourth quarter, the $8.2 billion, I guess, which sounds like maybe a floor. Just curious if that assumes kind of the April run rate that you've seen, if that kind of continues or if you're assuming continued acceleration there? Because I guess you also had a lot of stimulus dollars in the past couple of months being pumped into the economy. So just kind of wonder if you can help us out there with all the moving pieces.

James D. Hope -- Executive Vice President & Chief Financial Officer

Yes. Kelly, thanks. It's Jim. I think the best way to understand that the guidance in general is it's a floor. It's an at least number. And it's a floor at a time where there is, as you know, a good deal of uncertainty. There's a lot of things that will develop. Some could be positive, some could be not positive. I'm actually very encouraged and optimistic about the future. But we did provide a floor number of $8.2 billion in top line. And I think you know us well from the standpoint that we put down markers that we're very confident that we can meet or exceed. And that's why it's a floor.

Kelly Ann Bania -- BMO Capital Markets Equity Research -- Analyst

Great. That's helpful. And then just another question as you think about -- your customers, obviously, you've talked over the past several quarters, just about some of your customer types and maybe even geographic locations that have just performed better in this environment, whether that be in the South or pizza or barbecue. I'm just curious -- just an update on how those customers are maybe cycling or holding up against maybe some tougher comparisons. And I guess you talked a little bit about casual dining maybe coming back a little bit, but also the takeout and paper products business holding up. So just curious if you could help us kind of think about those dynamics by maybe format and geography a little bit more in depth.

George L. Holm -- President, Chairman & Chief Executive Officer

Yes. If you look at it geographically and if you look at the country and just say five different regions, the Southwest is performing the best for us. I mean it is for the industry, but it is for us, followed very closely by the Southeast. The West where we're not that large and where basically pizza and Italian is performing well. I don't know that it is as an area, but it is because of the pizza business, followed by the Midwest, and the Northeast by a long way is the lower performer. And then as far as customer types, we're real proud that when we look at what information we do get around share, we're picking up share in every type of customer type.

But we definitely have a mix that is probably better than most for this type of situation that we've been in for the last year. What's encouraging for us is when we look at our pizza business, we're actually continuing on a monthly basis to gain more share than we had before. And we're not seeing any reduction in growth compared to 2019 as we've gotten deeper into this and people have more -- or perceived -- we perceive people have more options with more seating opened. And then when you get to the casual dining chain business, that was the last to kind of come around, but their growth when it came was absolutely explosive, shocked us, huge growth. And we don't know if that's sustainable or not sustainable.

We have no way of knowing. But the casual dining business is doing real well. That's why in our prepared remarks we made the statement that it could end up that the chain business grows faster than the independent. It is -- they have really, really stepped it up.

Kelly Ann Bania -- BMO Capital Markets Equity Research -- Analyst

That's helpful. Can I squeeze one more just on inflation?

George L. Holm -- President, Chairman & Chief Executive Officer

Sure.

Kelly Ann Bania -- BMO Capital Markets Equity Research -- Analyst

Because just was thinking about the 3.5% number that you called out. And I was just curious if it's -- there's much difference between the Foodservice business, where there's maybe some more fresh and protein categories versus Vistar or maybe some of the price and commodity costs haven't kind of flowed through from some of the manufacturers yet? Just curious if you can talk about the differences there.

George L. Holm -- President, Chairman & Chief Executive Officer

When it comes to the bottom line, there's not that much difference. The Foodservice is definitely more volatile, being more commodity-driven. Coffee is up significantly. The beans are up significantly in price. But of course, our office coffee service business is down significantly. So when that business comes back, that could have some impact. And supplies are tight in a lot of areas and that causes inflation. So I don't think we can comment for the future in inflation. I think that's very, very difficult to do right now.

Kelly Ann Bania -- BMO Capital Markets Equity Research -- Analyst

Thank you

George L. Holm -- President, Chairman & Chief Executive Officer

Thanks

Operator

Your next question comes from the line of Jeffrey Bernstein of Barclays.

Jeffrey Andrew Bernstein -- Barclays Bank PLC -- Analyst

Great. Thank you very much. Two questions. First, George, you mentioned especially in Foodservice distribution, you can't have too many workers and you can't have too much inventory. But I get the sense that many of your peers don't have the capabilities and the balance sheet to invest ahead of the curve on, for example, labor and inventory like you seem to have. So I'm just wondering what have you seen in terms of closures or challenges for both your competitor distributors, presumably smaller and/or even restaurants. I'm just wondering what you think in terms of further consolidation of market share opportunity for yourselves as that sounds like a challenging environment for somebody who doesn't necessarily have the balance sheet that you might have. And then I had one follow-up.

George L. Holm -- President, Chairman & Chief Executive Officer

Yes. It's hard for me to comment on competitors. I think most of them are doing fine. We have not seen many closures. We have certainly -- I have gotten phone calls from people that have kind of had enough with being in this industry. It's a very, very tough industry. So that would tell me that there's some struggles there. But it's just a difficult time to be in business. That doesn't mean that we're going to have significantly less competitors. There's a lot of competition for labor right now, and there might be more competition for labor than customers. But that probably is more difficult if you don't have the right comp and you don't have the right benefits for people.

Jeffrey Andrew Bernstein -- Barclays Bank PLC -- Analyst

Got it. And then from a customer standpoint, I mean, are you seeing the -- I mean the restaurants that have made it this far, like you said there's been more explosive. So what is the estimated number of account closures or customer closures that you've seen year-to-date relative to maybe what the industry is talking about?

George L. Holm -- President, Chairman & Chief Executive Officer

Yes, we don't have great systems to determine that. We did a real deep dive in the Metro New York area and 35% of the people we sold pre-COVID are no longer in business. I think it's maybe 10 nationally. And I think that's one of the reasons that at the unit level, I think, people are doing quite well because there are lesser than out there. I will also tell you that real good operators, and every market has got some really good operators, they're getting the phone call from landlords and they have restaurants that are empty and they're willing to give them really good deals for people that they know are good operators, and we're going to see a lot of new openings coming up. And I think that for the most part, those new openings are going to be really good people.

And we're seeing some areas that are really in a boom right now. Florida and Texas, particularly, I mean they're just blooming. And they're attracting new restaurateur. There are people that they got open -- it's time to open the restaurant back up and instead of opening the restaurant up where they're at, they're actually relocating to open their restaurant. And we're seeing that as well. It's an interesting time, just a fascinating time, and I think it's going to be a very exciting time for the industry. And I think that on average, the restaurant operator is going to be a better operator than pre-COVID.

Jeffrey Andrew Bernstein -- Barclays Bank PLC -- Analyst

That's very encouraging. One last question just on the workforce. I've never seen that topic get so much attention on all conference calls, ramps up so quickly. Obviously, you're ramping up your [Indecipherable]. I'm just wondering what you're doing to fill those roles, whether you're inclined to pay short-term bonuses or do more over time? I'm just wondering how long maybe this lasts or whether you think you've done most of your heavy lifting from a hiring standpoint in the third quarter, and we shouldn't be hearing about this in the fiscal fourth or going into fiscal '22. Just wondering how you guys are approaching it to succeed from a hiring standpoint.

George L. Holm -- President, Chairman & Chief Executive Officer

That's a complicated question. I think we're doing -- at least I'd like to think that we're doing everything we can to get the right people in. But you can't -- it's expensive because you can't cut short on the training. If you think about it, If you get a driver out there too quick and they haven't been trained, one accident can cost you a whole lot more than training costs. And the same thing in the warehouse with mistakes, particularly in workers' comp, and you really got to spend the time with the people. And then we've had people coming back and people that were long time good warehouse employees for us and they come back and they do the work for 3, four days and just, "I can't do this work anymore."

But if you think about it, they've been sitting at home for a year and they're probably 30, 40 pounds heavier, and it's a different -- it's a different deal. We've got to work with those people. We've got to show a level of patience, and we just have to keep hiring. I really don't believe it's a long-term issue. It is certainly an issue, but I don't think it's a long-term issue. People need to work. Most people want to work. And they'll come in, and it's not -- it's just not about the comp. It's -- part of it is they don't really have to work right now. That's part of it.

Jeffrey Andrew Bernstein -- Barclays Bank PLC -- Analyst

Very encouraging to hear that. Well, kind of scared to hear that it's harder to hire than to get new accounts. But thats all from me. Thank you very much.

George L. Holm -- President, Chairman & Chief Executive Officer

Thanks

Operator

Our next question comes from the line of Nicole Miller of Piper Sandler.

Nicole Marie Miller Regan -- Piper Sandler & Co -- Analyst

Thank you, good morning. I wanted to go back to an earlier comment on fill rates. And I was curious if you could walk through what the averages were before it stands today? I'm thinking it had been 80% to 90% you could send to the restaurant what they wanted when they needed it. And then can you talk about the spectrum, like on the low end, how low does that go? And if it's not exactly what they're looking for in terms of full rate, what are the items maybe? Or what are the geographies or what -- what places are more challenged than others?

James D. Hope -- Executive Vice President & Chief Financial Officer

Yes, let me be clear. We're making sure we do a very good job of fill rates with our customers. We're taking care of their needs to the best we possibly can, and I hope our customers would feel like that they're being taken care of, and that's not a real issue. We're certainly doing better, I would think, than the industry standard. And then on top of that, one of the things we've done, we don't talk a lot about our systems because those are kept for us, but we've done some really nice work in the supply chain systems that we use and our accuracy levels have improved across the board in Foodservice.

They've really done some nice things over there to improve accuracy levels, which in the end, net-net, the customer sees at the service level, whether we had the inventory or not. It's helpful for them to make sure we pick the product correctly. So we're doing well in the outbound. On the inbound side of the business, supplier fill rates have been tough. They're dealing with the same challenge as everybody else has. It's absolutely manageable. We do a really good job with our inbound logistics approach, strategy and team as we always have. So I feel confident we'll continue to work through that.

Nicole Marie Miller Regan -- Piper Sandler & Co -- Analyst

Thank you. Helpful to understand the inbound versus outbound nature. The second and last question, I believe you have a material share of independent in the form of pizza and Italian segment. Are those sales keeping pace with the general April conditions of the poor recovery?

George L. Holm -- President, Chairman & Chief Executive Officer

Yes, they are. We're running the same kind of increases over fiscal '19 that we've been running pretty much throughout the pandemic.

Nicole Marie Miller Regan -- Piper Sandler & Co -- Analyst

Thanks for taking my question, appreciate it.

Operator

Your next question comes from the line of Jenna Giannelli of Goldman Sachs.

Jenna Loren Giannelli -- Goldman Sachs Group, Inc. -- Analyst

Hi good morning. I'm curious on the acquisition front with Reinhart now behind you, successfully integrated and leverage coming down. How are you thinking about the potential timing or areas of interest with respect to future M&A? Or is there just kind of too much going on your plate right now to address that right now?

James D. Hope -- Executive Vice President & Chief Financial Officer

No, there's not too much going on, on our plate to address that. So tackle that one first. Reinhart is well integrated, and the Foodservice division has done a really fabulous job bringing on an outstanding acquisition that has achieved every one of our expectations. On the Vistar side, Eby-Brown has done the same with the Vistar team. So we look at M&A with two approaches to bandwidth, Foodservice and the Vistar business being separate. So both of those have bandwidth for sure. As you know, from a liquidity perspective, we talked about $2.1 billion in liquidity. We are an acquisitive company. Our approach to M&A is unchanged. We're always looking for a good strategic fit for our business. And we'll continue to take a prudent approach to M&A and evaluate potential transactions as they arise.

Jenna Loren Giannelli -- Goldman Sachs Group, Inc. -- Analyst

Okay. That's super helpful. And on that point, as with the ample and healthy liquidity, I guess, how are you thinking about some of your upcoming callable debt? Does it make sense to potentially utilize some of that excess liquidity and just repay it? Or are you comfortable with kind of where the leverage is now and perhaps [Indecipherable] back in market?

James D. Hope -- Executive Vice President & Chief Financial Officer

Well, as you can see, we've had a strong free cash flow -- cash flow quarter. I feel very encouraged and optimistic by that about the next quarter and those beyond. We have a very healthy capital structure and clearly worked through the COVID liquidity concerns that anybody may have had. So our treasury team does a fabulous job of that with the rest of the organization. I think we'll continue to manage that well.

Operator

[Operator Instructions] Your next question comes from the line of Carla Casella of JPMorgan.

Carla Casella -- JPMorgan Chase & Co -- Analyst

Hi. Thanks for taking the question. You mentioned just now that your working capital was strong in the last quarter. And I'm just wondering how we should look at it for the fourth quarter, given that last year you had a big source of cash that was unusually strong at $485 million. Should we see it normalize more this year? Or how you -- any outlook for working capital that you could help us with?

James D. Hope -- Executive Vice President & Chief Financial Officer

Yes, I think normalized to slight improvements the way I'd describe it. And the reason I'd add on the last part is through COVID, the entire organization has taken a very disciplined and, I think, smart approach to managing working capital that's based on years of business experience and relationships with customers and suppliers. We have our own unique strategies in how we relate to suppliers. That's been helpful and important for us. We -- as you could see, even though sales volume built substantially throughout 3Q and even more so in April, we were able to manage inventory really, really well, very pleased with receivables. And I kind of feel like our customers, our sales team and the entire organization partnered together to make sure that everyone kept their commitments. So I'm pleased with how well receivables have been managed, and I wouldn't expect that to change going forward.

Carla Casella -- JPMorgan Chase & Co -- Analyst

Okay. Great. And you expect the payables to stay at these like the higher days where it's been since about mid last year? Or will that revert back once you -- once we're fully out of COVID?

James D. Hope -- Executive Vice President & Chief Financial Officer

Yes. I believe what we're seeing in 3Q will probably be the normal going forward. How we're relating to suppliers right now is our approach that we're going to take unless we have a reason to change.

Carla Casella -- JPMorgan Chase & Co -- Analyst

Okay great. Thanks for the help.

James D. Hope -- Executive Vice President & Chief Financial Officer

Sure

Operator

Your next question comes from the line of Peter Saleh of BTIG.

Peter Mokhlis Saleh -- BTIG, LLC -- Analyst

Great. Thanks. I want to come back to the conversation around labor. Given the current volumes that you guys are seeing past seven weeks, I think you said kind of all-time highs, are you comfortable with the level of staffing, the drivers and the warehouse employees? Or do you feel like you're understaffed to service those levels? And then secondly, do you anticipate any? Or are you seeing any evidence of slack in the labor market at all in anticipation of the unemployment benefits expiring in the fall? Or do you think this is something that's going to carry through the end of the year?

George L. Holm -- President, Chairman & Chief Executive Officer

Yes. I'll start off with staffing. No, we're certainly not happy with our level of staffing. We could use more drivers, we could use more warehouse people. And we're continuing to hire and continuing to train. And we thought we were ahead of it and the rebound in sales was greater than what we expected. So we have some catching up to do. I think that there's going to be enough people. And I do believe that for several reasons that the current unemployment and stimulus activity has had an impact because people will literally tell us that they want to come to work, but they'll do it after the enhanced unemployment ends.

Unfortunate situation, but you're going to deal with reality. So I do think that the employment situation will get better. We're a great industry to work in. I'm not sure that we make sure enough people understand that, but we're a great industry to work in and the compensation is high, particularly for a driver, and we'll find people that appreciate that.

Peter Mokhlis Saleh -- BTIG, LLC -- Analyst

Alright. Thank you very much.

Operator

Your next question comes from the line of Fred Wightman of Wolfe Research.

Frederick Charles Wightman -- Wolfe Research, LLC -- Analyst

Hey guys good morning. I was wondering if you could just comment on the sales gap between Reinhart and the legacy PFG business and sort of what you're seeing at this point in the recovery. I think last quarter, you'd mentioned that Reinhart was sort of in the middle with the market and sort of the legacy business. Wondering if that gap has continued to shrink as we've seen the accelerating trends in March and April? And any other color that you could comment on would be helpful.

George L. Holm -- President, Chairman & Chief Executive Officer

Yes. Well, we don't -- we haven't seen any numbers for the rest of the industry for April. But what we have seen is that Reinhart has performed better and better and closer to Performance Foodservice as we've gone through the year, and they are running significant increases over 2019. Now that's the last four weeks. And it was the end of March before they started to run over. So there's been consistent moves up and then a ramp-up.

Frederick Charles Wightman -- Wolfe Research, LLC -- Analyst

Perfect. Thank you.

Operator

That was our final question for today. I will now turn the call to Bill Marshall for closing comments.

Bill Marshall -- Vice President of Investor Relations

Thank you for joining our call today. If you have any follow-up questions, please contact us at Investor Relations.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Bill Marshall -- Vice President of Investor Relations

George L. Holm -- President, Chairman & Chief Executive Officer

James D. Hope -- Executive Vice President & Chief Financial Officer

John Edward Heinbockel -- Guggenheim Securities, LLC -- Analyst

Alexander Russell Slagle -- Jefferies LLC -- Analyst

Edward Joseph Kelly -- Wells Fargo Securities, LLC -- Analyst

John Stephenson Glass -- Morgan Stanley -- Analyst

Lauren Danielle Silberman -- Credit Suisse AG -- Analyst

Kelly Ann Bania -- BMO Capital Markets Equity Research -- Analyst

Jeffrey Andrew Bernstein -- Barclays Bank PLC -- Analyst

Nicole Marie Miller Regan -- Piper Sandler & Co -- Analyst

Jenna Loren Giannelli -- Goldman Sachs Group, Inc. -- Analyst

Carla Casella -- JPMorgan Chase & Co -- Analyst

Peter Mokhlis Saleh -- BTIG, LLC -- Analyst

Frederick Charles Wightman -- Wolfe Research, LLC -- Analyst

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