511 - Market Update Q4 2022

Our Company delivers exceptional value and quality products to our trading partners. With extensive distribution and expandable capacity, our core products are readily available.

Quarterly Market Update

Quarter 4 | Fall 2022

Product-to-Market Pathway SUMMARY: Raw material cost are stabilizing, ocean freight charges are moderating, and fuel prices are trending down. These are positive developments on the road to recovery that should continue through Q4 but are being offset by continued port congestion, increased shortages of truck chassis, North America driver shortages, and the threat of labor actions by railroad and dock worker unions.

Risk Scale

Low

Moderate

High

Factory-to-Port Outbound Logistics

Ocean Transport Inbound to North America

DC-to-Customer Outbound Logistics

Raw Materials

Manufacturing

Demand for oil and natural gas is surging globally and may lead to increased diesel fuel cost in North America in going into 2023. Extreme shortages of truck chassis is the latest in a string of crisis factors contributing to on-going port backlogs.

Typhoons impacted shipping time and port productivity at Shanghai-Ningbo, the world’s third - largest port, by forcing temporary closure for several days in September.

Covid zero-tolerance policies in China and the nation’s high vulnerability to outbreaks remain points of caution for North American supply importers and consumers.

High demand and constricted supply of

. Energy cost is a top contributor to raw material pricing and energy futures began declining last quarter with crude oil down touching the lowest levels since January, prior to the start of war in Ukraine. Raw material costs are less volatile through the middle of 2022 than compared to Q1, and to all of 2021. Supply and demand balance for most commodity materials should continue to stabilize into 2023.

shipping container space helped big ocean freight companies set record profits, over $256 billion so far in 2022. Limited shipping berths due to increased demand delayed deliveries and increased cost-of-goods, while boosting profits for big shipping firms. Ocean freight rates have begun cycle of receding that will take months to show up in cost-of-goods and is likely to be inhibited by shipping firm capacity manipulation to retain profitability.

New Covid outbreaks such as have happened in September in the city of Chengdu, home to 17 million people, will disrupt factory production and induce shocks to a still fragile global supply chain.

US West Coast dockworkers are

leveraging the threat of labor actions in contract negotiations a similar scenario that roiled the rail industry in September before rail worker unions signed new contracts.

One possible exception is specialty and thermal paper production where availability of raw material input is constrained and now affecting production rates and finished good prices.

Shortages of skilled labor and availability of raw materials, especially paper, are posing a new wave of challenges to North American manufacturers in the back half of 2022.

Q4 2022 Market Update

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Restaurant Industry Update

SUMMARY: Restaurant recovery continues through adaptation, smart pricing strategies, and embracing 3 rd party delivery. Distributors are broadening their offerings to stay relevant as Operator needs rapidly evolve.

COSTINGLESS TO DINE OUT THAN IN The price gap between restaurants and retail groceries remained at 5.5 percentage points in August, the largest in favor of restaurants in 40 years (CPI). Prices for food away from home, or restaurants, rose by 8% year-over-year in August, up from July’s 7.6%, compared to a 13.5% year-over-year increase in grocery prices. This gap is allowing restaurants to continue to take price increases. ( Nations Restaurant News, Bureau of Labor Statistics) 3RD PARTY DELIVERY VITAL TO RESTAURANT SURVIVAL DoorDash’s latest Economic Impact report, published August 30, states the company worked with 500,000 US restaurants and businesses last year. 58% of those businesses in-turn state that their revenue would have declined without DoorDash , a response that counters some negative press about delivery service fees and speaks to strengthening sentiment about the necessity of off-premise meal delivery in the restaurant industry. (NRN)

DISTRIBUTOR PRODUCT OFFERINGS GROW

Our growing/new customer base is requiring us to carry more products

43%

Our current customers are demanding a greater assortment of products

21%

Chains are requiring more custom brands

21%

70% of Foodservice industry Distributors surveyed by Technomic answered they have increased the number of SKUs in their portfolio since the start of the pandemic. Operator and consumer demand are the primary catalysis of SKU additions.

Shortages in many product areas are requiring us to fill in with more SKUs in those areas

7%

We are getting involved in more categories

7%

LEGISLATION TO DRIVE DEMAND January 2023 will bring bans on single use plastic items across Canada, and on foodservice products made with added-PFAs in California, New York and Washington. Demand for substitute products will shift in Q4 2022 as operators and distributors prepare for the new laws to go into effect.

RESTAURANT RESILIENCE: INSIGHT FROM AN INDUSTRY CEO “Rising food prices will eventually affect consumer restaurant spending. It’s a simple supply and demand equation. However, (#1) the consumer certainly has been relatively resilient thus far. (#2) Any restaurant still around today has also proven its resilience, as it has made it through the last few years of the pandemic. And (#3) with unemployment levels still near record lows, consumers still have disposable income.”

Dante DiCicco, Founder of Zitti, a restaurant industry supply chain service

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(Technomic)

Ocean Freight and Logistics

SUMMARY: Import demand remains at record levels, causing port congestion to spread from primary to secondary facilities across North America. Ocean freight rates begin to pull back, relief that will take several months to cycle through domestic inventories.

U.S. IMPORT ACTIVITY KEEPS HUMMING Imports totaled 2.53 million twenty-foot equivalent units in July up 18% year on year and 15% from July 2019, pre-pandemic. Canadian imports are up similarly, 19.6% over 2021, 26% since September 2019. As a result, port congestion across North America remains critically high. (American Shipper / Freightwaves.com, fxstreet.com) CONTAINER SHIPPING COST EASES September saw Freightos’ Baltic Index of Global Ocean Container rates recede per average container shipment, which is good news, certainly, but any cost relief for importers, operators and consumers will take months to appear, and may be tenuous because profit- hungry ocean freight lines can limit capacity and drive-up rates at any time simply by removing vessels from their fleets. And large initiatives have begun across the ocean shipping industry to convert fleets to cleaner-burning fuels, likely bringing new temporary constrictions of container berth availability and increased costs. WEST COAST JAMS TRIGGER BACKUPS AT EAST, GULF COAST PORTS Queues dozens of container ships-long have formed off ports in New York, Houston and Savannah, while the lineup of vessels waiting to get into Los Angeles and Long Beach has dwindled from an armada that once counted more than 100 ships. The queue at the Port of New York and New Jersey has reached about 20 vessels, while 40 container ships were waiting recently off the Port of Savannah. Port Houston, a growing destination for ships from Asia traveling through the Panama Canal, had 25 container vessels in-queue late in Q3. Industry executives and port officials said a surge in inbound cargo in recent months has swamped landside operations, straining storage capacity and the availability of container- handling equipment while slowing the ability of dockworkers and trucking companies to handle shipments. (Wall Street Journal) Georgia Ports Authority reported that its container unit volume of 5.76 million TEUs for fiscal 2022 was its highest ever volume, growing by 8% compared with fiscal 2021 container volume at ports. Organic growth, West Coast labor talks, and delayed access to rail at West Coast ports, prompt the significant shift in vessel calls to Port of Savannah. ( FreightWaves)

SUPPLY CHAIN DATA SHARING INITITIVE

A White House pilot to share freight data among shippers and supply chain stakeholders has doubled in size, with participants beginning to exchange information. The Freight Logistics Optimization Works initiative has expanded to 36 members, with ports, terminal operators and major carriers such as BNSF and J.B. Hunt joining as partners. US Department of Transportation expects the voluntary program to grow in the coming months and plans to hold listening sessions with small businesses and technology experts. A participating said in a statement that so far “participants have shared critical data that will collectively give us the ability to solve some of these supply chain bottlenecks.” (Supply Chain Dive)

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Domestic Shipping and Logistics

SUMMARY: Labor unrest and rail system stress emerged as the latest serious issues affecting outbound shipping across North America.

Delayed Containers

RAIL / INTERMODEL CHALLENGES

TRUCK DRIVER PAY IS RISING A study by the American Trucking Association released in August shows that an 18% increase in annual compensation for truckload drivers compared with 2019. More than 90% of truckload fleets raised pay in 2021, with an average increase of 10.9%. Implications of this trend are reflected in continued higher prices for over-the-road freight rates. (Transport Topics News) POTENTIAL RAIL STRIKE The potential US rail strike at the end of Q3 caused inflation jitters to edge higher. A tentative deal was reached keeping 125,000 workers on the job and temporarily forestalling significant domestic supply chain disruption.

Train speeds at Norfolk Southern were down 11% and flat at BNSF into the third quarter. Dwell times, the measure of time required for truckers to drop off and pick up loads, have been reported up across the rail network 20% and 12%, respectively. Velocity has improved ever so slightly in recent weeks at BNSF (up 1%) but Norfolk Southern (down 14%) has seen further declines. Port of Los Angeles Executive Director Gene Seroka said nearly 34,000 cargo containers destined for rail remained at the docks and more than 20,000 of those have been sitting for at least nine days. In the past, the port would only have roughly 9,000 containers waiting for rail service.

Stalled Containers

(FreightWaves, Deutche Bank)

Bloomberg

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Takeaways

SUMMARY: Supply chain volatility is lessening, bringing lower raw material costs and lower rates for ocean container freight. But new factors of labor unrest and equipment shortages threaten a sustained recovery. Inflation remains at 40-year highs ensuring that Fed increases will come and fueling fear that the economy will stall despite near-full employment.

▪ Mirroring general industry trends, 511 Foodservice continues to expedite supplies into its North American warehouse network at a record pace, receiving 35% more container loads of supply in August alone than its normal monthly average. ▪ US employment rate is hovering around 3.7%, a range considered to be full-employment. However, in Canada, unemployment rates have increased three straight months, jumping 5.4% in August in a sign that aggressive rate hikes by Bank of Canada may be starting to cool the economy. (Bloomberg, US Bureau of Labor Statistics) ▪ Managing price actively has become necessary, and generally adopted as a norm for maintaining profitability and business survival by suppliers, distributors and operators alike, throughout the foodservice industry. ▪ Revising and updating value propositions may help minimize losses for both operators and distributors, both of whom must stay flexible and envision product lines and service offerings as broadly as their customers and patrons deem attractive. (Technomic)

511 Foodservice Remains Your Steadfast Partner through the Tough Months Ahead and Beyond!

• 511 ’s breadth of product line and investment in North American manufacturing infrastructure helps us ensure supply continuity of essential

products to restaurant operators and distributor customers, as well as sustainable replacement options for legislation-impacted supply items.

• 511 continues to develop near-shore and on-shore manufacturing capabilities that will reduce supply chain risk for our customers and ensure

timely final-mile resupply to your operation.

• We are proud to serve your business and will continue making investments in our people and systems that create value for our customers. Our

focus on distribution network performance is paying off for customers as our fill rate and ship-complete rates steadily have risen to new highs in

each consecutive month this year.

• Watch for periodic promotion of limited-time deals on overstock and discontinued products as 511 adapts its product portfolio to meet evolving

customer demand.

• REMINDER: Chinese New Year 2023 takes place January 21 – 27 … plan your ordering, now.

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