US Foods Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 13 speakers on the call.

Operator

Turning to Slide 5, the first pillar is culture because our culture and our people fuel our strategy. Instilling a stronger safety culture has been a focus since the day I arrived at U. S. Foods. I am pleased to say that we have made very good progress in just 7 months.

Operator

Our Q2 year over year results improved approximately 20% compared to the prior year through a combination of tone from the top On a related note, I would like to recognize the 13 U. S. Foods Drivers who were recently named to the International Food Service Distributors Association Truck Driver Hall of Fame. This prestigious accolade is only awarded to those who have exceptional safety records, including 25 years of service without an accident. What makes this year even more special is that Alicia Seiler, One of our drivers based in Loveland, Colorado with 27 years of service was the first ever female driver elected to the IHSA Hall of Fame.

Operator

We are proud to have these world class drivers dedicated to safety at U. S. Foods as we strive to provide our associates, customers, Business partners and the communities we operate in with a safe and hazard free environment. Additionally, We recently published our 2022 Corporate Social Responsibility Report and I am proud that we have made continued improvement across our three focus areas of people, product and planet. I encourage you to go to our website to read about our progress from our sustainable products U.

Operator

S. Food Scholars Program to our compressed natural gas trucks and Scope 1 and 2 emissions reduction. Moving to service on Slide 6. As a reminder, our research tells us that the most important services to our customers are on time correct orders and high quality fresh products. Our product service levels to our customers are back in line with pre COVID levels.

Operator

Vendor service levels to U. S. Foods have also steadily improved. However, they remain slightly below pre COVID levels. This progress is yielding positive results from a service level perspective and is also helping us reduce our working capital.

Operator

Our routing initiative continues to make progress and in the Q2 we delivered the best cases per mile metric in the last 3 years. We are also preparing for a pilot of our new routing software later this year, which will significantly increase our capabilities. I look forward to our learnings and the progress we will continue to make. Finally, Moxy, our digital customer platform has now been fully rolled out among our local customers and feedback continues to be very positive as our Net Promoter Score results. Turning to Slide 7.

Operator

I'll walk through our 2nd quarter highlights in a bit more detail. We grew adjusted EBITDA by 17% despite essentially no sequential inflation and in fact modest year over year product cost deflation driven by center of the plate categories. Our adjusted EBITDA margins also increased 60 basis points from the prior year as our initiatives continue to ramp up and we gained operating leverage this quarter. Year over year, Total case volume growth was healthy at 3%. Case growth was led by 5% growth in independent restaurants and 7% growth in both healthcare and hospitality, while chain cases were down 4%.

Operator

Our independent case growth was negatively impacted about 70 basis points from slower growth in our Chefs' stores as we work through a systems conversion, which is largely behind us now. This means our broad line independent customer case growth was 5.5% for the quarter. The softer chain results this quarter are primarily due to no longer lapping Omicron, the softer macro and the impact on same store sales across most of our chain customers. Healthcare and hospitality continue to demonstrate strong growth driven in large part by helping net new business. We are pleased with how our target customer types continue to outperform the industry, resulting in shared gains.

Operator

With that said, we still have opportunity to improve performance as we focus on more consistent execution. We have good momentum and expected to further accelerate. Moving to our customer experience, we again gained year over year market share in our target customer types as we remain focused on executing our differentiated strategy. For independence, this is the 9th consecutive quarter of share gains, which demonstrates the progress we continue to make. I'm happy to report that Moxie is fully rolled out to our local customers.

Operator

Reactions continue to be very positive and we are releasing regular updates based on customer and seller feedback to improve this industry leading platform. We are now beginning to roll out Moxy to our national customers. This platform combined with our other leading digital tools and service model will enable us to continue to service our national customers well and build it and convert a strong new business pipeline, especially in our target customer types. We also actively expanded customer usage of Vitals, our technology suite for healthcare customers leverage added capabilities and help our customers more effectively manage their overall costs. Very importantly, we continue to make progress on our supply chain excellence journey during the Q2.

Operator

In addition to our improved momentum and safety, our productivity performance also improved year over year and sequentially for both delivery and warehouse, which is very encouraging. I am pleased with the progress we are making and expect us to further accelerate that progress in the back half of this year and into 2024. Our flexible scheduling and 7 day delivery pilots are progressing well, demonstrating results in line with our expectations, including a double digit percent reduction in turnover in each of our pilot markets. As I called out last quarter, our near term focus will be to expand flexible scheduling broadly. We only roll out 7 day delivery opportunistically where capacity is constrained.

Operator

Our team is actively working to expand the flex scheduling approach And we expect to have more than half of our locations live on flex scheduling by year end, which we believe will further improve associate satisfaction and retention. Finally, we continue to strengthen our capital structure and prudently allocate capital to fuel long term growth. Through earnings growth and additional debt reduction, we lowered our net leverage to 3 times, which is the first time we've been in our target range since it was established. Our debt ratings were upgraded by both rating agencies, demonstrating our strong progress and underlying business momentum. In parallel to the continued leverage reduction, we spent $166,000,000 on share repurchases.

Operator

Shortly after the end of the quarter, we closed on our first tuck in acquisition in 6 years, Renzi Foodservice. As part of our continued investment in Renzi, we are slated to break ground on the expansion of our Renzi distribution center this month, which includes approximately 10,000 square feet of construction, providing additional loading dock space for 8 new refrigerated loading bays to support our growing customer base in the area. We are excited to welcome the Renzi associates and I look forward to working closely with this high quality team to drive future growth. Each of the actions we've taken on deploying capital in a balanced manner reinforces our commitment to being responsible stewards Capital to drive long term shareholder value creation. With that, I'll hand it over to Dirk to go over our financial performance and guidance in further detail.

Speaker 1

Thanks, Dave, and good morning, everyone. Let's turn to Slide 9. We are very pleased with what we accomplished in the 2nd quarter and the strong momentum we continue to have at U. S. Foods.

Speaker 1

Adjusted EBITDA grew $64,000,000 or 17% from the prior year to $432,000,000 which was a record quarter for U. S. Foods. In addition to strong EBITDA dollars, we expanded our adjusted EBITDA margin 60 basis points from the prior year as our gross profit grew significantly more than OpEx. Finally, adjusted diluted EPS grew 18%, which is also a record.

Speaker 1

Within our results, net sales were $9,000,000,000 in the 2nd quarter, an increase of 2.1% over the prior year. Total case volume increased 2.7%, partially offset by year over year food cost deflation and product mix impact of 0.6%. As Dave mentioned, case growth was healthy overall and especially in our target customer types. Case growth slowed from the Q1 largely as expected Since we no longer had any year over year benefit from Omicron lapping in the Q2. We faced a headwind to case growth in the Q2 primarily from a system conversion at Chef's Door.

Speaker 1

However, we have largely worked through it at this point and are seeing sales improve. We are pleased with the 5.5% broad line independent case growth. We did see modest year over year product cost deflation. It was driven by center of the plate as groceries still showed year over year inflation in the quarter. Essentially, we had no sequential inflation and still are not seeing deflation in grocery categories, which is encouraging.

Speaker 1

Since grocery categories are predominantly a percent markup and more impacted by deflation compared to center of the plate categories, which are largely fixed markups and not as impacted by deflation. We continued our strong gross profit performance this quarter as our adjusted gross profit dollars increased 9% from the prior year. Most of this strength is due to the excellent progress we have made over the past year with our long range plan initiatives across cost of goods, logistics management and pricing. Our initiatives have been critical in mitigating the increased operating costs we and the broader industry have faced. OpEx was above the prior year for the Q2, albeit significantly less than the increases we saw in the past 2 years.

Speaker 1

The Q2 year over year increase in OpEx per case was largely driven by increased seller compensation and higher incentive compensation costs As distribution cost per case was better than the prior year. We continued our progress against both the growth and profit pillars, and I'll spend a few minutes on each of these. We are focused on profitable growth and share gains and our target customer types by leveraging our differentiated service model, digital capabilities and unique products. We are on track exceed our 1.5 times goal for restaurant volume growth for the full year led by strong independent case growth. In the Q2, we drove year over year share gains in each of our target customer types and continue to develop a strong healthcare and hospitality new business pipeline.

Speaker 1

As Dave mentioned, this was our 9th quarter in a row of independent share gains. As we grow faster with our target customer types, it helps our customer mix and drives profitability. Next to profit on Slide 11. In addition to profitable growth, We continue to make progress on our initiatives to increase EBITDA margins. Our team effectively managed a relatively volatile quarter for commodity categories as we leverage our processes and maintain our strong gross profit per case.

Speaker 1

At the same time, we further progress on initiatives such as cost of goods or COGS By working jointly with additional vendors, we remain on track to address a total of 60% of COGS by the end of fiscal 2023. We continue to advance our efforts to drive operational efficiencies as productivity improved year over year and sequentially for both delivery and warehouse. Our flex scheduling pilots are progressing well and demonstrating good results. This powerful initiative has a twofold impact. It gives associates more schedule flexibility and provides U.

Speaker 1

S. Foods with better associate engagement and retention. Ultimately, this adds up to a win for our customers through stronger service. Finally, we are progressing with our indirect procurement work I've identified a number of opportunities, which we are pursuing and will ramp up further value creation in 2024. I'm now going to pivot from earnings to cash flow.

Speaker 1

Turning to Slide 12. We continue to increase our strong cash flow And expect to build upon this as we grow earnings. Our strong cash flow allows us to continue reinvesting for growth and to further strengthen our capital structure. We have and will continue to prudently allocate capital against our four priorities to invest in the business, reduce leverage, return capital to shareholders and pursue accretive tuck in M and A to strategically expand our distribution network. Year to date, we have invested approximately $200,000,000 of cash CapEx and fleet leases, including projects to expand fleet, improve analytic insights and improve technology and supply chain and sales to enable further organic growth.

Speaker 1

I'll talk further in a moment on reducing leverage. In parallel with the debt reduction, we repurchased $166,000,000 of shares in the 2nd quarter, $150,000,000 of which came from the KKR stock sale. Following this repurchase, we have $286,000,000 remaining our $500,000,000 share repurchase program. In early July, we completed the acquisition of Renzi Foodservice and are excited to welcome the Renzi team to the U. S.

Speaker 1

Foods family. This is our first tuck in acquisition since 2017 and we are thrilled about the quality of this business and associates. Moving to Slide 13, we meaningfully reduced our net leverage compared to year end 2022 through a combination of net debt reduction and earnings growth. You can also see on the slide the significant progress over the past 12 months. Our net leverage ratio was 3 times at the end of the second quarter, which is the top end of our target leverage range.

Speaker 1

We continue to prioritize debt pay down and prepaid an additional $60,000,000 of term loan in the 2nd quarter, bringing us to $125,000,000 of prepayment year to date. Our overall debt structure is in good shape. We don't have any maturities until 2025. That said, We're looking ahead to the 2025 maturity and expect to proactively address that in the next quarter or 2. Actions this quarter resulted in credit upgrades from both rating agencies.

Speaker 1

We remain focused on creating value for shareholders and allocating our capital prudently across the four parts of our capital allocation strategy. Now turning to guidance on Slide 14. As a result of our strong year to date results and outlook for the full year, We are raising our full year adjusted EBITDA range to $1,510,000,000 to $1,540,000,000 And our adjusted diluted EPS range is $2.55 to $2.65 per share. We remain on track to reduce leverage below 3x by the end of the year. We are well positioned to deliver against this guidance and expect to be at the higher end of the earnings guidance if the macro remains similar to what we're seeing currently.

Speaker 1

With that, I'll pass it back to Dave for his closing remarks.

Operator

Thanks Dirk. I will close where I started. 7 months into my role, I couldn't be more excited about U. S. Foods and the opportunity ahead for our business.

Operator

Slide 15 summarizes our investment thesis and why I am so bullish. U. S. Foods is a strong company and we continue to get stronger. We are a leader in a highly fragmented industry In a pure play U.

Operator

S. Only based distributor focused on broad line distribution. Our business is resilient across Various macro backdrops and U. S. Foods offers further stability through our laser focus on controlling the controllables and executing against our long range plan.

Operator

We are targeting independence, healthcare and hospitality for growth, Where we believe our differentiation adds even more value and we are seeing the results in our outsized growth and continued share gains. This progress has been driven by the quality of our strong team, our service model and our digital capabilities including Moxy. I believe these are all compelling reasons to invest in U. S. Foods.

Operator

We are focused on building on the company's core strengths, while finding ways to more effectively execute our strategy and accelerate our rate of improvement. I am confident this combination will lead to a very bright future for U. S. Foods and all of our stakeholders. Finally, I would like to thank our 29,000 associates for their continued dedication and the excellent work they do each day to help our customers make it.

Operator

Our associates are critical to our success, which underscores why you matter is a very important one of our cultural beliefs. With that, Rob, please open up the call for questions.

Speaker 2

And your first question comes from the line of Mark Carden from UBS. Your line is open.

Speaker 3

Good morning. Thanks so much for taking the questions. So to start, it looks like you took meaningful market share in the independent channel, albeit with a bit of a slowdown in case growth relative to last Quarter. Outside of some of the disruption with Jeff's store, which it sounds like you've largely worked your way through. What are you seeing with respect to the health of this Customer overall.

Speaker 3

And any changes on how you're thinking about the channel's contribution to your growth in the coming periods?

Operator

I appreciate the question, Mark. We are seeing strong health of the operator and independents. And if you recall, I mean, we were Expecting the performance that we had in the Q2, if you recall, we had the Omicron lap go away during the Q2. And as we Provided color last quarter, we saw some softness in the March that bled into April. May June got sequentially stronger.

Operator

And while we don't give quarterly guidance, I can tell you the start to the Q3 has been at or slightly above what we saw exiting the 2nd quarter trajectory. So we feel very good about the health of the operator, but more importantly, our ability based on our differentiation to continue to take share in that segment of the business. And then besides that, healthcare and hospitality remain very, very strong. We're taking share in both of them and we have very strong pipelines across the board.

Speaker 3

That's great. And as a follow-up, just on deflation, how much did deflation intensify as the quarter progressed? Much risk do you see it ultimately impacting your grocery category sales? And then when you think about next year in the $1,700,000,000 EBITDA target, Is that contingent upon the returns on more normalized inflationary backdrop? Or do you have enough with your initiatives to Got that in a variety of scenarios.

Speaker 3

Thank you.

Operator

Good morning, Mark.

Speaker 1

This is Dirk. So overall, The inflation deflation picture was pretty similar across the quarter. So you saw it changing really as you were lapping prior year. But if I think of it through the quarter, Grocery, overall, still continued to see for the quarter a little bit of inflation. So we still haven't seen Deflation popping up there and in the proteins, a lot of that is coming from the lapping of much more inflation a year ago.

Speaker 1

And as I said in my prepared comments, we'll take that because those tend to be more fixed markups and our teams have very good processes to manage through it. So Even in this environment of very little inflation or modest deflation, we think we're very well positioned to manage through it. And as you've heard me say a number of times, as we focus on controlling the controllables, gross profit, the strong gross profit growth we've driven It's really predominantly been from a number of the initiatives we've executed.

Speaker 3

Great. Thanks so much. Good luck, guys.

Speaker 1

Thank you.

Speaker 2

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

Speaker 4

Hi, guys. Good morning and nice quarter. I wanted to start with I wanted to start on the cost side. You mentioned Distribution cost per case better than 2019. I think we look at the progress and OpEx per case and the progress Very good.

Speaker 4

As we look out the next couple of quarters, I mean, it seems like OpEx per case, Maybe year over year is minimal growth at BaaS 6 seems like you might be entering a period. Can you just talk a bit more about What's driving the cost per case on the distribution side down? Are we thinking about this rate going forward? Obviously, there's puts and takes around wage inflation. Just any help there would be great.

Operator

Yes. Appreciate the question. I'll start at the higher level and give Dirk a chance to weigh in on the specifics. But as we said the last couple of quarters, we feel very good about the momentum we're getting On productivity, both in our warehouse and in delivery, you heard me say on the call there, we had sequential improvement as well as year over year improvement in both. And so the initiatives we're driving, we're very excited about.

Operator

We expect those to continue to get traction in the back half of this year. And I would point out to your point, this is 5 or 6 quarters in a row where our operating expense growth has continued to decline And that's based in large part by the good work our team is doing, particularly in supply chain.

Speaker 1

And the only thing I would add is In the quarter, as I commented, overall distribution cost per case was lower than it was a year ago. And the two areas that really drove our Increase were seller compensation, which is driven by the strong gross profit results we've had. And then secondly, incentive compensation, which is It's a good place we're going to have higher costs because it drives teams continue to perform at a stronger level. So we feel, as Dave said, very good about the progress and the path ahead and our ability to effectively manage costs and gain leverage.

Speaker 4

And then just a follow-up on gross Profit per case, a 6% gain this quarter with some deflation is obviously very encouraging. As we think about the quarters ahead, is there any reason that you shouldn't at least be gaining in that Gross profit per case, I mean, just where you stand today, it doesn't seem unreasonable at all that You've had at least a low single digit year over year gain there continuing. But maybe just some color there and Where do you think you stand in terms of like the innings in terms of the upside here?

Speaker 1

Sure. Good question. So for the Q2, adjusted gross profit dollar grew about 9%. So pleased with that. And I think the Yes.

Speaker 1

If I think of the year over year, you may see some lesser year over year increases just because we've had such strong gains as we're lapping those, we get to your point, get back to a more normalized environment. But continue to feel very good about the durability and strength of our gross profit per case. And I think the way we continue to look at it is There's not an end. We're going to continue to focus on the gross profit gains. And our goal here is to continue to run the place to grow gross profit faster to do OpEx and drive margin, because as you know, our overall EBITDA growth is a balance of profitable growth, especially in those target customer types of leverage.

Speaker 1

And we think we have We're happy with the progress we made and we have a lot of runway ahead.

Speaker 4

Thank you.

Speaker 5

Thanks, Ed.

Speaker 2

Your next question comes from the line of Brian Harbour from Morgan Stanley. Your line is open.

Speaker 6

Yes. Thanks. Good morning, guys. Can you maybe just comment also on the chain restaurants? I know it's Kind of not the customer focus at this point, but any change in trends with case volumes for chains?

Operator

Yes, I'll take you back Brian, good question. I'll take you back to some of the commentary we had in the last quarter. And if you recall, one of the things I said When we were down a little bit less than the market was don't read too much into that. It has in large part to do with the portfolio of changes each of The competition has, number 1. Number 2, we weren't surprised at all because of the lapping of the Omicron effect that we pointed to in the Q1.

Operator

And then the second thing is the backdrop within the chain segment has gotten softer as the year has progressed. I'd point to 2 things. 1 is The Technomic data that said change we're going to be up about 200 basis points back in January, they adjusted that to flat for the year in May. And then recent Black Box data had the 2nd quarter for chains down anywhere between 2% and 3%. And I think they pointed to about 2.7% in July.

Operator

Talent independence and continue to run our playbook.

Speaker 1

I think Brian, hopefully what you continue to see here in the Q2 is in a pretty normalized operating environment This recovered the fact that our overall independents still growing at 5.5% in the broad line, which as I said in the Q1 call, we We think sort of in the mid-5s, that's a very strong case growth. We're taking share. Healthcare and hospitality is not by chance that we're growing still at 7 market and so those are the things that we're going to continue to control the controllables Despite the macro backdrop, we feel good about where we stand and our outlook.

Speaker 6

Okay, great. The deflation rate you saw, if that was sort of Steady through the Q2. Is it do you think it will be something similar in the second half? Or how are you thinking about that? And then also just You had kind of the LIFO benefit from lower inventory values.

Speaker 6

Will that still be kind of a factor in the 3rd Q4?

Speaker 1

Sure. Maybe I'll take them in reverse. So LIFO is hard to predict based on deflation or inflation, what happens there. I mean, I'll remind you that the way we report adjusted, It's backed out of there. So that is not a help for us in our adjusted EBITDA numbers.

Speaker 1

It does help in our overall GAAP numbers. And the second part is In the second half of the year, yes, it was pretty stable in the second quarter because the second half of the year, if we continue to see some Deflation at this point based on what we're seeing, I expect it to be continued to be driven primarily by the center of the plate categories As grocery, as I mentioned before, still really hasn't shown signs of deflation there. And even if we see some modest additional deflation in protein, we feel very good about our ability to continue to drive our strong results.

Operator

Thank you.

Speaker 2

And your next question comes from the line of Jeffrey Bernstein from Barclays. Your line is open.

Speaker 7

Great. Thank you very much. Two questions. The first one just on the follow-up for the total case growth. I know we dissected and the independents were better and the chains were worse.

Speaker 7

But in total, I guess, a little bit of a slowdown. I'm just wondering whether this concern of a slowing macro or maybe what your expectation is for the back half total case growth within your updated 2023 guidance. Think Dave, you mentioned the upper or Dirk, you mentioned the upper end of earnings guidance if the macro holds. I'm just wondering what that assumes for total case growth for the second half of the full year?

Operator

Yes, Jeff, appreciate the questions. I would point to the comments I made earlier around the stability in the independent space and the health of the operator holding up quite well, particularly as we put the calendar here into the early part of Q3. Importantly, Our ability to continue to take share, I'm getting nothing but more confident around that given the strength of our team, our ability to lean in, in the local market basis and provide the best value and product offerings and really understand where we can target those independents. That continues to get very, very strong. All that's contemplated in our back half outlook.

Operator

So we would say we're in a very stable environment and we will continue to take share there. And I already commented on the chain space and our focus there. And I think

Speaker 1

if you just come back to Dave's comments that he made in his prepared remarks just around The lapping of Omicron, I mean, that is 200 or 300 basis points across much of the business. And so when you think of Q2 being a very normalized environment, I think The business is still growing at 3%. We have a lot of businesses that are really going backwards pretty meaningfully. And the fact that we are growing much faster than that in these target customer types, which are more value added, more profitable, etcetera. As Dave said, we feel very good about where we are, what we saw in July and the stability of the overall macro.

Speaker 7

Understood. And the follow-up is just on the EBITDA margins. I know you talked about the 60 basis points of expansion to the 4.8%. I think you previously noted that for full year 2024, so a year from now, would hope to get back to at least 4.6%, which was pre COVID levels. I know the seasonality at play and it's difficult to compare the Q2 of this year to Kind of a full year guidance for next year.

Speaker 7

But Dave, if you were just taking a step back, I mean, how do you assess the ultimate potential for those margins over time, Whether you look at comparable peers or whether you're looking at historical trends, just trying to get a sense because again, at least this quarter, you're already above kind of that pre COVID level, Again, stripping out seasonality, but just your thoughts on the EBITDA margin going forward? Thank you.

Operator

I feel good about our ability to control what we can control, Not so much concerned to your point around what our peers are doing, but what we're doing inside our company. And as you've heard Dirk say here a couple of times this morning, We're focused on initiatives and things that we can control and we think there's still a lot of juice in the squeeze. And so I'm feeling increasingly positive about my comments Last quarter around our ability to deliver against that $1,700,000,000 plus or minus in 2024. And obviously, we'll have more Say about that as we get further into the year and provide guidance for next year, but nothing gives me reason to pause. I have just continued to gain confidence around our ability to execute and ramp up both our growth and profitability.

Speaker 5

Thank you. Thank you.

Speaker 2

And your next question comes from the line of Kelly Bania from BMO Capital Markets. Your line is open.

Speaker 8

Good morning. Thanks for taking our questions.

Operator

Myself.

Speaker 8

I also just wanted to talk about EBITDA margins. I guess historically your second half EBITDA margins in total are a little stronger than your First half, but your guidance, I think, seems to imply a little bit of the opposite, maybe a little bit lower in the second half. So just Curious if you can talk about how much of that is conservatism or other factors that might be impacting the margins in the second half Or any change in maybe seasonality that we should be thinking about as we think about the second half?

Speaker 1

Sure. Hi, Cali. This is Dirk. So overall, pleased with the progress we've made on the overall margins. I think as we think about the outlook for the year, Even what's embedded in there, especially my commentary about the higher end that includes being in a normalized environment, a pretty healthy EBITDA Growth rates still in the second half of the year of high single to low double digits.

Speaker 1

So I feel good about ability there. I'm not going to comment on Specifics within the different lines, but what we do expect is we do expect to continue to still make progress on our EBITDA margins And I think there's still, as Dave commented, plenty of opportunity ahead. We feel good about where we stand at the halfway point and our outlook for the balance of the year.

Speaker 8

Okay, that's helpful. And maybe just to follow-up, I don't think we have your sales Outlook for this year or have had that. But I guess, just curious if or to what magnitude deflation Has impacted the outlook for this year and next or if that really was already in your For the year or if you kind of had to internally make any changes to your outlook given kind of where food pricing is, Help us kind of understand how that's evolved into your expectations for this year and next?

Speaker 1

Sure. I think that just because inflation and deflation have been harder to predict, so it may impact the sales dollars, but it doesn't really impact Overall, given that's come primarily in these protein categories, our strategy and what we've executed against. So there's not been a whole lot we've had to adjust. What we are focused on, as you know, is really the case growth and the strong case growth that we have and continue to have across the business. I think that we do watch the different categories very closely and where we may see inflation and deflation showing up.

Speaker 1

But in the current environment, We're going to stay the course and we think that will generate the continued momentum that you've seen over the last 4 or 5 quarters.

Speaker 8

Thank you.

Speaker 2

And your next question comes from the line of John Heinbockel from Guggenheim Securities. Your line is

Speaker 9

open. Hey, guys. I wanted to start with the broad line independent growth, right? If you think about Growth in distribution points, right, growth in locations served versus drop size. I'm curious how they relate to each other, which one is bigger?

Speaker 9

And then maybe Dave, your thought on wallet share. And without giving numbers, I guess, but thoughts on how high is up, because it still seems that For you and others, it's way too low versus what it should be.

Operator

Yes. John, we feel good about it. Again, with the backdrop of the help of the operator that I mentioned earlier, our ability to take share is strong. I'm pleased with our rate currently of new account generation. But I do believe there's ample opportunity for us to continue to penetrate our existing customers while we're bringing on new ones, and then ramp up the penetration of those new customers the course of time.

Operator

Our team gets that algorithm very, very well and is extremely focused on it. And in the quarter, I would say the new account generation was a bit stronger than that penetration to the first part of your question. But we're squarely focused on both and have a lot of confidence in both going forward.

Speaker 9

And then maybe a totally different topic. Obviously, gross margin was healthy when we had inflation. It should be also right healthy with deflation. But if I look at the vendor management, right, or procurement, that set of opportunities versus mix, Both product and customer, which one do you think is bigger, let's say, looking out 12 to 18 months? Is vendor the vendor management piece larger Where you think they're equally sized?

Operator

I'm not sure I'd give a nod to either one of those at this point. To your point, John, we've got a lot of activity going on in both areas And there's still a lot of room for improvement in both.

Speaker 1

And I think, John, if you think about what you think of both really is the continuous journey. And that's when you think about the customer mix piece, that's why we have relentlessly been focused on outgrowing with these target customer types because of the value add that we think we can bring the overall profitability mix that comes with that.

Speaker 9

Okay. Thank you.

Operator

Thank you.

Speaker 2

And your next question comes from the line of John Ivankoe from JPMorgan. Your line is open.

Speaker 10

Hi, thank you. I know in previous calls, we've Talked about maybe some opportunities around indirect spend, low hanging fruit. I think maybe some the word unaddressed Previously was previously used. Where are we in that journey? I guess how much is kind of showing up that you actually might want To consider and is this just maybe getting more out of your current spend or is actually reducing total dollar Then be a part of the opportunity?

Speaker 1

Hi, John. Derek, thanks for the question. So it really is We've progressed where we've now identified a number of opportunities, we've begun to go after them, expect to see some modest dollars show up later this year and then ramp up over the course next year. So good progress since we talked about it last quarter. And it really is a lot about optimizing our current spend.

Speaker 1

And so in these cases, as you've heard us talk about, we're targeting typically trying to offset our cost inflation as much as we can with productivity. And this would be one of those levers as we try to do that. So good progress and we think there's plenty of opportunity ahead.

Speaker 10

And Dave, from your perspective, as you've kind of come in and kind of seen the way that U. S. Foods was previously Structured, are there any kind of thoughts that are emerging the longer that you get on spend time in the seat of just maybe Things other than just some of the regional structures that you've done and things that can be differently? And your continued exposure to the Chefs' Store, Is that a business that we should expect increased capital and over time or is that under evaluation?

Operator

Yes. So I feel very good about the momentum that we've got. Chef's stores, I'll just take that one quickly. Obviously, the complication around the systems conversion that we've had here has made it a little difficult to get a handle on underlying volumes and those sort of things. Still believe very much In the value of the business case and the synergies with Broadline and we'll be looking as we get the system stuff behind us to get the right data linkage to prove that to ourselves.

Operator

But opportunistically going forward, as I've said last quarter, I see a lot of opportunity really in all areas of the P and L. Importantly, I'd point you to what I said last quarter is that we ramp up this thinking around Continuous improvement in productivity and efficiency in that 3% to 5% range, we'll have more to say about that. But as Dirk just highlighted, The intent to offset inflation by getting more efficient and productive every year is a constant theme that you will see us talk about here going forward in the business. And I believe that's a fairly significant change in the organizational thought process here, but more to come on that in the future. Thank

Speaker 5

you. Thank you.

Speaker 2

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

Speaker 11

Hey, thanks. Good morning. Just a couple of follow-up questions. One, I wonder if you could clarify how The new routing software benefit to come, I guess, in 2024, is that already contemplated in your views of Being able to get toward that previous $1,700,000,000 EBITDA target for 2024 or could there be upside relative That are related to this?

Operator

Yes. There always could be upside, but that was contemplated as part of the long range plan when the company put that out in the $700,000,000 target for next year.

Speaker 11

Got you. And on turnover and retention, Yes, any additional color there on the progress through the 2Q, I guess driver turnover you've gotten that back toward 2019 levels already and Warehouse turnover was still above, but maybe just some updates on how far you've gotten, where that goes next?

Operator

Really good progress in both areas. The turnover in the warehouse and on the outbound side continues to persist a little stronger Then delivery to your point, we're not quite back to where we hope to be at this point in 2019 levels. However, we've got 3 quarters in a row now of continued Reduction in turnover and improvement in productivity both in delivery and warehouse and to our discussions around things like our flexible scheduling initiative And the significant ramp up that we've gotten on that in the back half of the year, being in more than half of our markets after this pilot phase here in the first half, gives me a lot of confidence that we will continue to drive significant improvement there, aims that getting back to where we hope to be. So really good momentum and more to come.

Speaker 5

Great. Thanks.

Speaker 1

Thank you.

Speaker 2

Your next question comes from the line of Andrew Wolf from CL King. Your line is open.

Speaker 5

Thank you. Good morning. The market share you're taking with independents, what are you Facing that, could you share with us what your belief is the independent sector for foodservice distribution It's growing or not growing like what are you comparing that to?

Speaker 1

Good morning, Andrew. This is Internally, we do a relative to Technomic because that's what you guys and many other investors have more access to. Internally, we use on a month to month basis, we use an NPD data set because it's much more granular and actionable. And so when we talk about the share gains On a regular quarterly basis, that's using NPE data. So 80% or 90% of the industry provides that.

Speaker 1

And so we're seeing share gains using that. So it's an independent. They measure everybody the same and pleased to have progress. If you look at Technomic, as Dave said, the Technomic outlook, I believe, For this year calls for independents to be down a couple percent and I think change to be flattish kind of overall restaurants down. So if you think of Where we are relative to that of the strong independents continuing to grow at 5% to 6%, and again, that in chain A little bit slower, but again, that hasn't been our focus.

Speaker 1

And we will take all day continuing to grow at a much faster pace with independent healthcare And that remains the focus.

Speaker 5

Okay. Thank you. On your sales associates, Obviously, with the increase in selling more, they're going to make more money. But could you talk about sales product, the associate sales associate productivity Versus hiring new folks as the driver of the market share?

Speaker 1

So overall, the way we think about it when we look at market share, it's overall just how we're doing in markets, how we're doing by categories, how we're doing by restaurant And then underneath there, there is as you expect, there will be a third we have a performance management process of how individual sales reps are performing. But in parallel, we do continue to actively hire sellers, especially in those markets that are growing at a faster rate. So it really is a blend. And as we think about share gains, we expect that to be driven by both Performance Management, but definitely by continued adding of sellers in those markets that are growing faster.

Speaker 5

Okay. Well, I guess more of the same and it's working right now. And lastly, following up on your lower cost per case and distribution, That includes fuel and mileage, right? So as we unpack different things, we look at from the Warehouse to delivery, sounds like it would be more on the delivery side given some of the progress you're already making On the routing, some income on bringing stuff back and obviously fuel. Is that On a dollar basis, is that the way to think about where most of this better results are coming versus Not incrementally, just sort of like for the quarter.

Speaker 1

Overall, I guess, I'll come back to where Dave talked about earlier in his comments That's it. What we're pleased with is we're seeing productivity improvement in both warehouse and delivery. So they're both contributors. They each have impacts on, yes, on fuel, on routing, etcetera, and they each contribute. So without parsing out the individual, I think the more important takeaway is When we think upstream on the retention of the turnover, etcetera, seeing the improvement and that's leading to overall lower cost per case and that's demonstrating what we're doing is working and we expect to do more

Speaker 5

of that. Okay. Thank you.

Speaker 2

And your next question comes from the line of Jake Bartlett from Truist Securities. Your line is open.

Speaker 10

Great. Thanks for taking the question. My question is about gross profits per case and the ability to maintain that. And you understand that Protein in the center of the plate are generally priced on a dollar markup, so the deflation doesn't impact it. But my question is whether that could allow for Greater price competition.

Speaker 10

So it seems to me the biggest risk is that competitors try to drive business more with price than Service levels as I have over the last few years. So how would you assess that risk? Are you seeing any kind of more aggressive pricing out there? How do you expect to approach pricing going forward?

Speaker 1

Overall, we feel good about the durability of our gross profit. I think for the last few quarters, we've been asked how we thought we would fare with lapping large inflation a year ago. And hopefully what people have seen as we've demonstrated still strong gross profit results despite that and that comes back to The focus we've had on our own execution of initiatives driving the results that we're seeing. I think that From a macro and competitive environment, it continues to be stable. It's really back to a pre COVID world where it's a competitive industry And that's where we operate in, but we haven't seen a level of irrationality that's very different than you would see in a normal environment.

Speaker 1

So quite healthy And we expect to continue with strong gross profit driving solid very good EBITDA growth.

Speaker 5

Great. Thank you so much. Thanks.

Speaker 2

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

Speaker 5

is open.

Speaker 12

Great. Thanks for taking the question. I just wanted to come back to the Chefs' store conversion issue. Can you just elaborate on what that system issue was? And is the 70 basis point impact fully confined to the 2nd quarter?

Speaker 12

Or do you think Any of that will bleed into 3Q?

Speaker 1

Peter, hi, this is Dirk. So overall, we think through there is We had to convert off of system under a new system by earlier this year as part of our purchase agreement, which we did. So all markets are converted. And it's not uncommon unfortunately for when you have conversions of this magnitude to have some challenges, which we did see. Let me just put it into context.

Speaker 1

So when we talk about Sales challenge there is down low single digits, but when you compare that to independents that are in the broad line are up 5.5%, it has a more meaningful impact there. And some of the challenges there were around us to do conversions resulted in issues where orders weren't fully going through, etcetera. So we had Less product on shelves, etcetera, that's all been remediated. It has been for a few months, and we've been focusing on continuing to get customers back in the store to recoup that and do expect the to get back to growth in the second half of the year.

Speaker 12

Great. And then just On the leverage being around 3 times currently, how are you thinking about capital allocation kind of going Forward, is it more debt pay down or do you think you'll shift a little bit more to share repurchase at this point in time as EBITDA continues to grow and the leverage kind of comes down Naturally.

Speaker 1

Well, I would expect, as you know, Dave's comments, so we did close early in the Q3 The Renzi Foodservice acquisition, so that is a Q3 use. And then on top of that, I do expect for the near term a continued balance Debt pay down and share repurchase, we think both are important and we're going to continue to focus on both. I think The good working capital performance this year as a team service levels have improved. Our teams have very methodically gone through and found those opportunities to remove some of the Added stock, we added when vendor service levels were lower, while still focused on maintaining high customer service levels. That's allowed us to generate these even Stronger working capital numbers this year, which is helped with the funding of the acquisition, etcetera.

Speaker 1

So to directly answer your question, I have to expect it to be balanced, but you will see our first Talking M and A, which we're excited about.

Speaker 12

Thank you very much.

Operator

Thanks, Peter.

Speaker 2

And we have reached the end of our question and answer session. I will now turn the call back over to Dave Flitman for some final closing remarks.

Operator

Thank you all very much for joining us today. Our business is strong and I have great confidence in our ability to accelerate our momentum. Have a great day.

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Earnings Conference Call
US Foods Q2 2023
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