Nov 9, 2016
Operator
Good afternoon, and welcome to the Performance Food Group First Quarter Fiscal 2017 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by PFG's management and the question-and-answer session.
I would now like to turn the call over to Michael Neese, Vice President of Investor Relations for PFG. Please go ahead, sir.
Michael Neese
Thank you, Stephanie, and good evening and thank you for joining us. We are here this evening with George Holm, Performance Food Group's CEO, and Tom Ondrof, PFGs Chief Financial Officer.
During our call this evening, unless otherwise stated, we are comparing first quarter fiscal 2017 results versus the same period in fiscal 2016. We issued a press release regarding the results after the closing of the market today.
You can find our earnings release on the Investor Relations section on our Web site 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 and in our SEC filings for various factors that could cause actual results to differ materially from forward-looking projections. On today's call, we may reference certain non-GAAP financial measures.
Descriptions of these non-GAAP financial measures and reconciliations to the most closely comparable financial measures, calculated in accordance with GAAP, are included in today's earnings release and in our presentation slides. Now, let’s turn the call over to George.
George Holm
Thanks, Michael. Good evening everyone and thank you for joining us today.
I'm pleased to announce PFG's results for the first quarter of fiscal 2017. Our underlying business performed well in the quarter.
However, we experienced many challenges during the first quarter. We grew our total sales cases by 6.5% with incremental market share gains.
This is at the high end of our 4% to 7% guidance. The 6.5% total case growth is one of our best growth quarters since fiscal 2015, despite our national account business softening during the quarter.
Our Performance Foodservice segment reported strong independent case growth of 8.0% and double-digit independent performance brand case growth, all of which were organic. We made planned strategic growth investments in PFG Customized and Vistar in the first quarter, and these investments will continue through our fiscal second quarter as we enhance our diverse business model to further provide a significant growth opportunity in fiscal 2017, and over the next several years.
We experienced higher than expected new business transition cost and corporate expenses during the quarter, leading to adjusted EBITDA coming in below last year and below our expectation. Tom will discuss this in greater detail in his remarks.
We remain focused on improving sales, productivity, and increasing gross profit. We continue to expect to grow our overall cases in the 4% to 7% range in fiscal 2017, and grow our independent cases in the 6% to 10% range.
We are focused on managing our corporate expenses. But, at the same time, we will continue to add talented sales associates as we enhance and strengthen our foundation for growth.
In addition, our pipeline for future M&A continues to be attractive. Before we get into the financial details, I would like to continue our practice of highlighting one of our associates, this time for her service to our country.
As our nation observes Veterans Day this Friday, I would like to recognize Andrea Baldino, a military veteran and filed accounting manager with our Vistar division. Andrea served in the U.S.
Army for nearly 2.5 years, primarily as the diesel mechanic at Fort Hood. After finishing her bachelor's degree from the University of Cincinnati, Andrea joined our Vistar location in Arlington, Texas nearly two years ago.
We’re proud to have Andrea on our team and want to thank her and all the veterans for their military service. Tom will go into the detail of our financial results, but I'd like to discuss a couple of key highlights for the quarter and provide updates on Customized and Vistar strategic growth investments we outlined for you last quarter.
Our case growth of 6.5% in the first quarter continued to far exceed forecasted real industry case growth. Case volume growth reflected new and expanded business with independent customers in the Performance Foodservice segment and broad based growth in Vistar's sales channels.
Net sales for the fiscal first quarter of 2016 increased 3.0%. Net sales were driven by case growth in Performance Foodservice, particularly in independent channel, and sales growth in Vistar.
Overall, food cost deflation was approximately 1.5% in the fiscal first quarter of 2017. We continue to experience deflation in meat and eggs, and to a lesser degree, in dairy.
Gross profit increased 6.3% compared to the prior year, and was driven by the growth in cases sold. Gross margin as a percentage of net sales was up 40 basis-points in the quarter.
Now, let's turn to the performance in our three segments. Performance Foodservice net sales for the first quarter increased 2.9%.
Case growth was fueled by securing new independent customers and further penetrating existing independent customers. Independent sales, as a percentage of total segment sales, were up approximately a 130 basis-points to 45.2%.
EBITDA for Performance Foodservice was $73.8 million, up 4.7%. The EBITDA increase was lead by strong case growth and 6.6% increase in gross profit.
This growth was against the strong EBITDA growth of 27% in the first quarter of fiscal year 2016. PFG Customized net sales for the quarter decreased 6.5% to $867.3 million.
The decrease was driven by the planned exits of certain customers to free-up capacity for the addition of new business with Red Lobster, as well as lower case sales to some customers in the casual dining segment. EBITDA for PFG Customized decreased to 46.6% to $3.9 million.
This was a decrease in excess of what we expected as two of our chains that we were exiting left early. We kept the warehouse and delivery employees associated with that business until the on-boarding of Red Lobster.
We experienced a decrease of 7% in gross profit and an increase in operating expenses. Increases in personnel expenses, cost associated with upgrading the portion of this segment’s fleet, and increases in insurance expense, impacted Customized EBITDA.
As we previously mentioned, PFG Customized had planned exits of certain customers to free-up capacity for the addition of new business with Red Lobster, to which we began making shipments in some geographies back in August. The planned exit of customers affected Customized first quarter financial results, but we expect to benefit from this transition in the back-half of fiscal 2017.
In the first quarter of fiscal 2017, we began providing distribution solutions to a portion of Red Lobster’s Restaurants. As of this week, we are now delivering to all 678 domestic restaurants.
This week, we began delivering the last group of Red Lobster's which is 118 restaurants from our Texas Distribution Center. The roll-outs have gone well, and we want to thank the dedicated associates from Red Lobster and PFG Customized.
With the planned customer exits, we expect Red Lobster will generate new revenues of approximately $500 million. We expect to no longer have approximately $100 million in sales annually based on previously communicated customer closures.
So, on a net basis, including the additional Red Lobster and customer closures, we expect to generate approximately $400 million in incremental annualized net sales this fiscal year, which is in line with what we communicated last quarter. Turning to Vistar, net sales increased 17.3%, driven by strong broad-based case growth across Vistar's channels and by recent acquisitions.
EBITDA for Vistar increased 0.9%, although gross profit dollars growth was 14.4% for the first quarter, operating expense dollar growth increased 19.5%. The operating expense increase was driven by investments associated with expansion of geographies, certain of Dollar Stores channel, and the opening of new facilities.
As we've mentioned previously, Vistar's results will reflect some investments for future growth. First, in the latter part of fiscal 2016 fourth quarter, Vistar began servicing the new geographies in the Dollar Stores channel, which required additional expense with another distribution center and service with customers in Metro New York.
Productivity improved as we progressed throughout the quarter, and that’s continued to improve in the month of October. The additional expense will be with Vistar for the next several quarters until the volume can be efficiently integrated into a new distribution center, which will combine two centers to one.
The second investment for Vistar is the new prototype distribution center in the Metro Memphis area for handling our pick and pack volume more efficiently. Although, we’ve not integrated the entire automated process, the new distribution center is now shipping product and productivity is progressing each month.
We will continue with two Memphis pick and pack distribution centers until we’ve fully integrated the facilities. Once the project is fully operational, it will drive future productivity and profitability as we consolidate the two distribution centers to one.
PFS and Vistar's growth plans are in place to deliver growth for several years. Customized is now growing their sales as they’ve on-boarded all of the Red Lobster's.
We’ve a strong pipeline of potential acquisition candidates, and we will remain disciplined in our approach to acquiring companies. We’re committed to growing value for our shareholders over the long-term.
I would like to introduce PFG’s new CFO, Tom Ondrof. Tom joined the PFG following a 24 year carrier with Compass Group, North America.
During his ten year accountancy of several leadership roles and financing planning as controller, CFO and Chief Strategy Officer, we’re very excited to have Tom joining our PFG family. And I would like to turn the floor over to Tom.
Tom Ondrof
Thank you, George. It’s great to be a part of the PFG’s team, and I look forward to contributing to the continued growth and success of the Company.
I’ll briefly go through our detailed first quarter financial results, discuss our cash flow and balance sheet, and wrap-up with our fiscal 2017 outlook. As George mentioned, case volume growth was very strong at 6.5%, while our net sales for the quarter increased 3% over prior year to $4 billion.
The difference between the sales and case growth rate was primarily a result of ongoing deflation, but was also impacted by case pack-size changes from some of our suppliers. Gross profit dollars also showed solid improvement, increasing 6.3% in the quarter compared to prior year.
The increase was the result of growth in cases, as well as selling an improved mix of products and customer channel, specifically through the independent channel. Operating expenses increased 9.7% to just under $480 million, during the first quarter versus the prior year period.
While we plan for our operating expenses to increase in the quarter due to the strategic growth investments in Vistar and Customized, significant additions in our sales force and incremental expenses with being a public company. We were further impacted by higher than expected new business transition costs and corporate expenses during the period.
Let me take a moment to expand on each of those, starting with new business transition costs. The roll-out of sizable new customer accounts to Customized and Vistar was in full-swing during the period.
In order to ensure we provided a seamless transition with complete product availability and outstanding customer service at each location, we opted to incur higher than planned labor, facility, and transportation cost. Along with the start-up cost to bring our new automated retail center online, these short-term transition costs are expected to normalize in the second half of the year, and provide the platform for significant top and bottom-line growth over the next several years.
Additionally, corporate expenses were higher than planned during the quarter compared to prior year, as a result of incremental increases in employee medical claims, legal expenses and settlements, insurance expense related to, primarily to workers’ comp, and stock-based compensation expense. Our adjusted EBITDA of $76 million was down 5.1% from prior year.
Net income was flat at $12.2 million in the quarter, as operating profit, which was down $12.4 million, was offset by an $8.1 million decrease in the interest expense and a $4.3 million decrease in income taxes and other expenses. For the quarter, the income tax rate decreased 390 basis-points to 37.4%.
The majority of the decrease was a result of an increase in permanent deductions related to the adoption of a new accounting standard. Diluted earnings per share decreased 14.3% in the first quarter of fiscal 2017 over the prior year period to $0.12, and adjusted diluted EPS decreased 4.8% in the first quarter of the prior year period to $0.20 per share.
Turning to cash flow, we absorbed $75.2 million in cash from operating activities, an increase of $49.3 million versus the prior year. If you recall, the prior year included $25 million break-up fee payment received related to the terminated agreement to acquire 11 US Food facilities from Sysco and US Foods.
The remaining increase in working capital is due primarily to the Company's continued sales growth and investments related to the roll-out of new business in the Customized and Vistar segments. Turning to investing activities, the Company spent nearly $35 million in capital expenditures in the first quarter, or 0.9% of net sales versus $17.7 million in the prior year, or 0.4% of sales.
The Company also paid just under $15 million for a tuck-in acquisition in our Vistar segment. While our net debt at the end of the first quarter increased to $123 million during the quarter to $1.3 billion, we remain disciplined in our uses of cash and leverage, as evidenced by our net debt to adjusted EBITDA improving by nearly one-turn compared to the end of the quarter last year.
Based on the impact of increased new business transition costs and higher corporate expenses, during the first quarter of 2017, we now expect full-year adjusted EBITDA growth to be in the 7% to 9% range on a 52 week to 52 week basis, and between 5% to 7% on a 52 week to 53 week basis versus the comparable 53 week fiscal 2016 adjusted EBITDA of $366.6 million. The 53rd week fell in the fourth quarter of fiscal 2016.
Also due to the first quarter results and the remaining impact of new business transaction costs, and other strategic investments in the second fiscal quarter, the Company now expects adjusted EBITDA in the first-half fiscal 2017 to be down slightly versus the prior year. Second half fiscal 2017 adjusted EBITDA growth is expected to be in the mid to high-teens versus the second-half of fiscal 2016, which excludes the extra week.
Overall, we were pleased to deliver 6.5% case growth and 6.3% gross profit growth in the quarter. And as we clear the sizeable new business transition of efforts over the next few months, we remain confident in our ability to manage controllable operating expenses and continue to drive both sales and gross profit as we progress through 2017.
And with that, operator, George and I will now be happy to take questions.
Operator
[Operator Instructions] Your first question comes from Vincent Sinisi at Morgan Stanley.
Vincent Sinisi
Wanted to just ask, regarding the investments around Customized and Vistar, sounds like maybe a bit higher than expected. But so far, things are going at least relatively well.
Can you maybe just give us a little bit more color around the different steps, and how we should think of the investment path as we go forward? I think you mentioned for at least one of the items normalize as we get into the second-half.
But if you could just give us a little more color around the basics of the process, and how you see that as we progress through year, that’d be great.
George Holm
I will start with Customized, this is George, and I’ll move into the Vistar. With Customized, we thought we had things planned out fairly well as to when we’d exit business and when the new business would come in.
And we had a couple of the chains that did leave early, which was fine. We still decided that we obviously aren’t going to lay-off employees for a short period of time, and then try and bring them back, and risk losing them.
So, we held on to all those employees with less business than we expected. So to look at on-board the new business properly has gone very well.
We haven’t had any issues, right help from our people and from theirs. And we now have all that business in place starting this week.
So we expect to have some impact in November, obviously, not anywhere near what we had in the first quarter. And then as we go into December forward, then we’ll be in very good shape there with good growth.
We will have less customers actually less concepts, less queues. We’ll have more scale per concept obviously higher dollar sales, higher gross profit dollars, fewer stocks, and bigger drops.
So, that situation is now behind us, and we feel very good there. When you get to Vistar, not quite as simple, the addition with distribution center that we put in New York, until we find the right facility to put the two together, and it’s not something that we want to rush and make a mistake.
We need some significant excess capacity there for some things that we have in the future. So, that’s going to continue.
It does get better each month. I think we’ll be able to give much better guidance coming up.
Our productivity has gotten close to what we are in our other Metro New York center, but we lose a lot in density, because we’re only doing one piece of business at that distribution center. Then if you move to, and by the way we also brought that into our Connecticut, our Mid-Atlantic, and our Carolina’s distribution center with a little bit of pain there too, but that’s all behind us and those centers are back to normal productivity, and have the additional business.
If you move to our retail automation facility, what we call retail central, that’s in Memphis; once again, getting better all the time. We’re adding business into their each week.
We’ve taking it slow and we’re taking it carefully. But once again better productivity, all the time, we’re at a point now we’re more productive in that automated facility than we are in our existing pick and pack facilities, which are entirely manual.
So good news there, it's just going to take a little time to get that consolidated from two down to one.
Vincent Sinisi
And just a quick follow up, if I may. Your two main competitors of course have reported this week as well.
And I think there is maybe just a little bit of confusion on some, what you’re seeing, either in results and/or commentaries by some of the managements, in terms of, just kind of the, overall health of the restaurant in particular industry. So if you guys could just give us your take, and by customer segment whether or not, that would be great?
George Holm
This will just to be just obviously my take in what we see. We’re in a different world, but then I think they both had very good quarters.
And we have better growth, but certainly not as good quarters as they had. If you look at our Performance Foodservice business, we were, in the month of August, we’re right at 9.0, the same independent growth that we had run the previous quarter.
As soon as we hit the political conventions, we saw a little softening. We were like mid-sevens for case growth in the month of August, a little softening during the Olympics as well.
As we've got into September, we put back up again a little under eight. And then in the last weeks, we've been actually better again.
So whatever that means, I'm not sure. I think it means that the independent restaurant continues to do well, and we’re doing well in that area.
In Performance Foodservice, our national account business did weaken throughout the quarter, and that's continued into October. We go our Customized business and we saw continued weakness in casual dining that has continued into the month of October.
We don’t expect it to continue from here. Fortunately, we’ll still have sales growth because of our additional new business.
But we think a lot of it has to do with, I guess, the election maybe this disconnect between the price of food at home and the price food eat now. Our Vistar business has been extremely strong.
Every channel that we’re in, we are seeing sales growth and we’re actually growing that business organically better than we've grown that business, I would probably say and its history since at least -- since we're owned it, which was 2002. So kind of three different worlds there, but that's what we see today.
Operator
Your next question is from John Heinbockel of Guggenheim Securities.
John Heinbockel
So, George, I was going to ask when you look at Vistar, it looks like there was a sequential pick-up right if I back out the extra week from the fourth quarter. So, is that primarily organic?
And what channels, I know it's broad based, but what channels would drive the bulk of that as one or two that stand out?
George Holm
Well, the bulk of it is organic. Our acquisition wasn’t real big.
As far as the channels that are driving it, one, is maybe not necessarily a channel, but we call it good to go and it's like protein bars, and energy bars, and energy drink, and things like that, where we've put a great focus on. That would be the fastest growing part of our business, even though it goes across several different channels.
Our business in hospitality has grown well as more people put pantry's into their midscale hotels it's where that’s been good. Theatre business has been okay.
Our retail business, in spite of retail being soft, but our retail, what we call our big box business, has been very strong. And then vending has been an industry that has lived for a long time, and for the first time we’re seeing what we’ve grown each year, but it’s just been through adding share and it’s been fairly small growth.
We’re saying good growth there today, and we think it’s got lot to do with micro markets, a lot to do with a free vend, which is something that started on the West Coast, and it’s really spreading. So that’s being good for us.
But really it’s just across every business that they’re in we’re seeing good growth; and double-digit in some of the channels.
John Heinbockel
And then secondly, so, when I look at the Performance Foodservice segment, I know you’re up against begin a year ago, but mid single-digit probably one year slower rates of growth in the past couple of years. Was there any investment in that business to [multiple speakers]?
George Holm
We invested fairly heavily in sales people. We have three large additions that we’re doing to facilities, but that would not have impacted us any real degree.
What it was really is we’ve been building that business, we’ve been building people, we’ve been adding a lot of drivers, we’ve adding sales people, we actually are at the highest level of the increase from a percentage standpoint and sales people that we’ve been in many years. What really impacted us there the most, I would say, as far as not leveraging as well as we would like to have been, would just be the softness that we experienced in national counts.
And if you think about our Performance Foodservice business and you compare that to our competitors, we do so little in healthcare and contact feeding and lodging, and the restaurant industry, especially the chain world was slower at least that’s what we read everywhere. And that’s what’s our business is when you get outside of our independent restaurant business.
So I think that probably has something to do with it. But we’re very confident moving forward in our Performance Foodservice business that will do a much better job of leveraging the growth that we have for the rest of the year.
And we’ll be up against slightly softer comps.
Operator
Your next question is from Kelly Bania of BMO Capital.
Kelly Bania
I was just curious, what was the dollar amount of incremental transition costs that you experienced in Q1 above your expectation, and how should we think about that in Q2? And I guess on top of that is, is that something that you expect to cycle and not incur next year when we get to Q1 and Q2?
Tom Ondrof
Kelly, this is Tom. Just to answer the second question first.
Yes, unless there are additional investment opportunities that we come across later in the year. But none of those are right in front of us at the moment.
I think the best way to look at the transition cost is the operating expenses are up about 970 basis-points, about 250 of those or what we would say would be, were higher than expected, 250 basis-points in two buckets. The corporate cost I talked about, medical workers’ comp, were about 60% of that, and the other 40% were the transition costs -- the other 40%.
So of the 250 basis-points, 60% of it was corporate cost higher than expected and 40% for transition cost higher than expected.
George Holm
This is George. I think I’ll add a couple of comments to that.
We operate with quite low expense ratios and we’re used to leveraging growth when we have growth. But these were somewhat unusual circumstances.
We’ll get our arms around each one of these. And I think, to put it this way.
What I tell our people today is, let this quarter bother us very much we’ve got a lot of great things going on, but don’t be patent yourself on the back when we get to this time next year either, because we’ll have some easy comparisons. But we don’t see anything here in the near future that would be any big investment.
We got plenty to get on track right now and we've got some good built-in growth. So that's our biggest emphasis right now is to get back to leveraging this growth that we have.
Kelly Bania
Okay, that's very helpful. And then I guess your guidance for the second half is now for I think you said mid to high-teens EBITDA growth.
And I think it was mid single-digit to low double-digit prior. So I guess just the delta there.
Are you expecting these investments to drive some incremental EBITDA in the second half, or what is the difference in the guidance there in the second half?
George Holm
Obviously, number one is we leverage this growth that we have, that's the number one of this as far as kind of importance going. We have some additional business that’s coming in just after the first of the year, which will also help us.
And I think another thing to remember, some of this investment started in May of last year. It was very heavy in June.
So we’re going to have some fairly easy comparisons as we get towards the end of the fiscal year. So, that's part of it as well.
Operator
Your next question is from Edward Kelly at Credit Suisse.
Edward Kelly
So could I just -- I want to start with a follow-up on the transition costs. George, it sounds to me like taking a step back and listening to you guys that, the issues on this side is more timing oriented than I guess execution oriented.
And I just want your thoughts as to -- around whether that's fair or not. Why is it harder to forecast some of this stuff?
And then as it relates to all of this, is there anything that's going on here that would impact the customer, and what the customer sees from you?
George Holm
No, I think that's part of what caused some additional expenses. We wanted to make sure that the customer didn’t.
And I would have to tell you that our initial performance in the dollar segment in Metro, New York was not something we were proud of, but we got that handled fairly quickly. And other than that, and I would have to say, other than that.
I don’t think our customers have seen any difference in this.
Edward Kelly
And also just a follow-up on the guidance, and just going ask the question in a very straight forward way, and the question is really is, is it conservative enough? And the reason I asked that is because obviously you were just asked about the back-half and the guidance is now higher than what it was before.
But could you just maybe give us a little bit more color to give us some comfort on what's changed today versus the end of last year that gives you more confidence in the back-half of the year?
George Holm
Well, I guess, so we have some additional business coming on. We typically, through the year, we build payroll and we don’t see that really happening.
We’ve already made those investments early in the year. The only thing I would say where it could be -- we might be conservative or not conservative, I guess, I should put it, is that we really don’t expect to see the national account business, as, I guess I would use the term weak, as it's been the last couple of months.
We’re through the political stage here. We also are through the Olympics, and some of the things that just seem to put some slowness into that business.
And we just don’t believe that people’s eating habits change that quickly. The other thing that was impactful was that people didn’t promote.
Some of these larger chains didn’t promote much through that period of time, TV adverting was very expensive to get because of the political season. Radio time was very expensive to get.
So there wasn’t the advertising to support heavy promotional activity. So, it’s just a combination of many things, and we just feel we’re not going to experience that degree of softness.
Edward Kelly
And just last question for you is related to M&A. George, you mentioned an attractive pipeline.
Could you just remind us the types of opportunities you’re looking for? Does the current -- the challenges of the business currently in the first half of this year impact in any way the way you would think about timing of all those given that you kind of have a lot going on I guess as it stands?
George Holm
No, not at all. We don’t really acquisitions that aren’t material, but we have done two in the last couple of weeks.
They are both center of the play companies, which is something we want to build on; very important, obviously, broad line food service distributors, which we have a pipeline there. And then Vistar, we’re always looking at the right opportunities, and we have confidence that we’ll have more of those.
From an operating standpoint, right now, the issues that we’re dealing with are so isolated, particularly with Customized back on track. And we have no desire to make any acquisitions in that business.
So, I think that it really, Ed, won’t have any impact at all.
Operator
Your next question is from Karen Short of Barclays.
Karen Short
Just a couple of follow-ups, in general. So first starting with Vistar, I guess, I am wondering why there was a disconnect on gross profit dollar growth versus sales growth, given that there was about 300 basis-points spread on that, so that’s my first question and then I have a couple of others.
George Holm
On the difference between sales growth and gross profit dollar growth, we had a fairly good increase in sales in that dollar channel, and a big customer involved with that as increased their SKU base. So in other word, they’re a wider variety of product.
They don’t operate with storage the stuff is deliberately goes to the shelf. So, they are using pack sizes.
And so it almost makes it appear like its deflation, if that's how you are looking at it. And if that's not the case, it's just that our average case price in our Vistar channel was affected by that.
Karen Short
And then I guess just to understand OpEx increase, feel like you’ve been asked this, but I guess I still am not clear in the answer. But I feel again in 4Q you indicated that you felt that you’d resolved or smoothed out the OpEx lumpiness post fourth quarter for the new business.
And I guess I'm wondering what caught by surprise?
George Holm
Well, the things that caught us by surprise were it took us longer to get the automated to compact facility up in going. We had problems at one of the stations, took us a while to resolve that.
We found that we didn’t have the capacity in New York, and didn’t realize that it would take us -- it's probably going to take us a while to find the distribution center there. Like I said, these things are improving month-to-month.
So we’re still dealing with that. And then we had customized planned out pretty well and then we had business that left earlier than expected.
So it left us with more employees and a reduced amount of gross profit dollars during that period of time, which had a pretty significant impact on OpEx.
Karen Short
Yes, the Customized made sense on the OpEx. I was just wondering on Vistar.
But since you bring that Customized, just to clarify, so the top-line miss then it wasn’t entirely a function of the planned exits happening earlier than expected, meaning Red Lobster is contributing at the run-rate you expected. I know you gave us a pretty detailed...
George Holm
Yes, that's correct. But Karen we did have a softer sales environment than we expected with our existing customer base.
And we did talk about this on the last call. It hadn’t happened yet.
But we had one concept that closed 98 stores. We have another concept to close 27 stores; so those were rather unexpected for us as well.
Karen Short
And then just last question on deflation, one retailer earlier this or last week, I guess, mentioned that in salmon, and in particular had turned inflationary. But I'm wondering if you could give some color on -- given that your exposure to see if it's obviously higher now.
But what your deflation or inflation outlook might be for fiscal ‘17?
George Holm
Yes, we've seen the deflation pretty much go away in sea food right now. The current pricing has come back.
And as we mentioned with salmon, I think those are the two really big items. The areas that we're still seeing fairly significant deflation are in beef and then in cheese, and of course eggs.
That's somewhat deflation, but it's more about them being so high price last year.
Karen Short
And what are your thoughts for the year for deflation?
George Holm
Well, we can only go with what's, I guess, supposed experts tell us. But it appears as if beef is going to stay down in price for quite a while just because of the availability unless something what happened in the export markets.
Cheese was really going down last year. So from now to the end of the calendar year, last year, it's softened.
So we don’t expect to see a big reduction in -- we don’t expect to see as much deflation as we've had over the last year in cheese coming up from now until the end of the year and then probably not into next fiscal year, should we see any deflation either.
Karen Short
Okay...
George Holm
Our customer mix is -- I mean our item mix is not the same for every company in this business. But I think it was at 1.5% I think we have for deflation.
So it’s moderated for us some.
Karen Short
So maybe flat is possible for the year, or?
George Holm
I don’t think would be staying deflated that it would be flat. But I perceive that it should continue to go down a little bit, and heavily impacted by cheese for us.
Operator
Your next question is from Bryan Hunt of Wells Fargo.
Bryan Hunt
Just touch on two topics that have been touched on already. One, when you look at acquisitions, and I know you’re always looking, you’ve done a couple.
How would you describe the pipeline? Is that maybe more robust than it was a year ago, or less?
Is there any way you can give it some quantification?
George Holm
We haven’t been as acquisitive in the last few years. But we would call it much more robust than it was then.
And we feel better probably today, I would say, than we have ever felt about the possibilities that we have in acquisition area.
Bryan Hunt
And it is that because just numerically the number of companies that are for sale, or is it because of the multiples are more reasonable or?
George Holm
No, I would say it’s more so just, people that are willing to sell today [multiple speakers].
Bryan Hunt
And when I think about acquisitions, I think you all touched on this in the past. But where do you feel comfortable running the leverage up to on the balance sheet?
George Holm
Well, we’re going to be opportunistic. And it’s just depends on the quality of what’s out there.
But for us to lever back-up, we’ve been a size 5.7 before, we don’t certainly don’t want to do that. But we could easily lever up a couple more turns if the right acquisition was available.
Bryan Hunt
And then my last question is, when you look at all the projects you have, and it seems like you’ve got some duplicative facilities you’re trying to exit. Automation that you’re getting to that project as well.
What’s your outlook for CapEx? Last time we talked it was 140 to 160.
Has that changed at all in terms of tempo?
George Holm
Our budget this year is for 150, so right in the middle of what you just described is the range. Once again, there, we’re going to be opportunistic with it.
We’ve got some great additions that we’re doing now in our Performance Foodservice and that certainly where we most want to spend our money. The opportunity was great in Vistar to do this new facility.
We did a large one. We have a very robust pick and pack business.
We have a B2C business where we do fulfilment that we feel can be a big category for us. So that’s why we did that.
And then we’ve got a lot of OpEx that we can take out in Vistar just by going to one facility and three markets where we have two. So, those obviously will be something that we’ll look to do when the right facilities are available.
Bryan Hunt
And then my last question is, when you looked at the Customized division and your pull-out the locations over closed, and the roll-up of Red Lobster. Is there any way you can gauge what maybe same-store case volume was in Q1 and do you feel like it is actually troughed, now that you’re seeing October numbers?
George Holm
So I’d say this all the time, we’re real careful that we don’t talk about any of our customers, that's their job. But in its entirety, definitely saw the same-store sales level.
And I think they were all working hard at their business, and they are improving their business. And we’ll find out, I guess, coming up how much it has to do with the political season and the Olympics.
And it's just a soft environment. And we just feel like we're going to see some sequential improvement in that business.
Operator
Your next question is from Ajay Jain of Pivotal Research.
Ajay Jain
My question was actually mainly guidance related, and about your conviction about the back-half of the year. But I think you already got a couple of questions along those lines.
So I wanted to ask you about the outlook for Q2, specifically. And I wanted to ask if you are expecting any stabilization in EBITDA trends?
Or you are looking for similar decline to last quarter?
George Holm
Well, at this point, we would expect it to be better than the first quarter. We’re not projecting to be ahead of the previous year for that 26-week period of time, so little different quarter too from the standpoint that holidays affect our business a good bit.
Last year we did not have a holiday in November. This year we will.
Last year we had two holidays, Thanksgiving and Christmas in December. We will have, I mean, and this year we will have two holidays in December.
But then in January last year we have the New Year's holiday fell in January from a fiscal standpoint. It will -- I mean last year it fell in December, this year it will fall -- last year's January this year it will fall in December.
So we're going to have an easier comparison as we get into the third quarter.
Ajay Jain
I guess just the commentary on the first-half of the year, gives a lot of room for interpretation for Q2. So maybe I’ll just ask it slightly differently.
I mean, do you expect directionally EBITDAs is going to be up or down in the second quarter?
George Holm
Slightly down.
Operator
Your next question is from Zack Fadem with Wells Fargo.
Zack Fadem
Just to clarify. Can you help me bridge the gap to get your 3% top-line growth number?
So, if organic growth was -- organic volume was 5.3% and deflation was down 1.5%, can you help me just size the impact of the pack size mix change? And then, what was the sales impact of M&A to get to that 3%?
George Holm
So, the M&A was very marginal, it's just one small acquisition in Vistar. I’ve got to do the math.
Do you have an idea on that, Tom?
Tom Ondrof
I don’t know, if we can follow back up with you.
Zack Fadem
Okay, that's fine. We can do this offline.
And just quickly...
George Holm
And primarily, yes, we should -- we’ll get that number to you. But in our Vistar business, we did grow our cases a good bit more than we grew our sales.
So that's where it's going to be, it's not...
Zack Fadem
Yes, I mean, that's what I'm trying to get at is just the specific impact to bridge that gap. But just moving on, I want a follow-up on an earlier comment.
Just George with respect to your overall business mix, you’re under indexing some of the larger institutional verticals, like healthcare, hospitality, et cetera. I’m curious how you think about the opportunity to expand there.
Is it a matter of national scale? Or are there any particular hurdles that prevent you from being more involved in those channels overtime?
George Holm
No, we do some business in those channels where we have the scale to do that in the product line to be healthcare. Not having national scale, we’re certainly not going to able to do a national program with all those -- with those types of channels.
But for us, I mean, we’re doing a significant job, growing our independent business. And we’d rather focus on that today.
I think we can only do so many things at one time. And that’s the growth that is the most important to us.
And then to properly leverage our business, we want some growth in our national account channel, and that, we weren’t able to get in this first quarter. We should have a little bit up in the second quarter and it will be better in the back half of the year.
So, we have several things that are just better in the back-half of the year.
Operator
[Operator Instructions] And we do have a follow-up from Kelly Bania of BMO Capital.
Kelly Bania
I was wondering if you could talk a little bit about gross margin. And the impact if any that Red Lobster had on gross margin in the quarter.
And I guess how you think gross margin for the next couple of quarters?
George Holm
Well, our gross margin is improving in Performance Foodservice. It’s fairly flat in Vistar.
Our gross profit per case in Customized is slightly up. Our gross profit as a percent of sales is about flat.
And as far as the impact that Red Lobster would have, I think, a lot of that’s got to do with how their mix of business settles in as they have some very, very expensive products. And we don’t have a good enough feel for that yet as to what that will do from a margin standpoint.
We do those programs, so we do in great detail what our cost is to move the case of product and those are fee-based not margin based. So we really don’t look at it that close.
But that is something we’ll make sure that as we get through this quarter and into the next call we’ll give some real color on that.
Operator
There are no further questions.
George Holm
Thanks everyone.
Michael Neese
We’d like to thank everyone for their participation on today's call. We look forward to presenting at the Morgan Stanley Conference next week in New York City.
Thank you.
Operator
Thank you. That does conclude today's conference call.
You may now disconnect.