US Foods Holding Corp.

Ladies and gentlemen, thank you for standing by and welcome to the quarterly 2021 performance review. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 in your telephone keypad. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Ms. Melissa Napier. Ma'am, the floor is yours.

Thank you, Lawrence. Good morning, everyone. Welcome to our first quarter earnings call. Today we have Pietro Satriano, our CEO, and Dirk Lacascio, our CFO, on the call. Pietro and Dirk will provide an overview of our results for the first quarter of fiscal 2021. We'll take your questions after our prepared remarks conclude. Please provide your name, your firm, and limit yourself to one question. During today's call, and unless otherwise stated, we're comparing our first quarter results to the same period in fiscal year 2020. References to organic financial results during today's call exclude contributions from Smart Food Service, which we acquired in April of 2020. Our earnings release issued earlier this morning and today's presentation slides can be accessed on the Investor Relations page of our website. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our 2020 Form 10-K for those potential factors which could cause our actual results to differ materially from those expressed or implied in those statements. Lastly, during today's call, we will refer to certain non-GAAP financial measures All reconciliations to the most comparable GAAP financial measures are included in the schedules on our earnings press release, as well as in the appendices to the presentation slides posted on our website. I'll now turn the call over to Pietro to get us started.

Thank you, Melissa, and good morning, everyone. Today we're going to focus on the recovery, the recovery which has been extremely good news for our industry. Yet a recovery that has also called on our associates to work harder than they have before. So I do want to take this opportunity to recognize our 26,000 associates whose tireless commitment to serving our customers over the last several months has truly been second to none. In this call, we're going to cover three themes which are outlined on page two. First, our industry continues to recover and we are participating in that recovery in a meaningful way. During the last few months, we have seen a steady increase in volume and restaurant traffic as in-person dining restrictions continue to be lifted. The recovery that we have seen over the last few months and our rebound in sales from markets that are more fully open gives us the confidence that the industry will fully recover to, if not exceed, 2019 case volume levels. Our scale and differentiated strategy is driving market share gains across most customer types, as our technology, innovative products, and team of industry specialists have provided customers with the necessary resources and tools to thrive in the current environment. And third, as case volumes have begun to recover, we have seen our financial results strengthen. We expect our financial results to continue to improve as the recovery continues. But the same recovery that is driving volume gains is also driving tightness and labor for customers, distributors and manufacturers alike. We believe, however, that this tightness to be transitory and to ease in the latter part of the year. Moving to slide three. The food service industry is experiencing a recovery as in-person dining restrictions are eased around the country as COVID-19 vaccine distribution becomes more widespread. The chart on the left shows that traffic at restaurants recently exceeded traffic at grocery and convenience stores and is very close to returning to pre-pandemic levels. The recovery is being driven not only by eating restrictions, but as importantly, by consumer sentiment. As shown by the chart on the right, consumers are becoming increasingly more comfortable eating out, a trend we expect to continue as vaccination rates increase and COVID cases continue to decline. And last, Even as dining out continues to recover, we expect some of the increases in off-premise dining to become permanent, which augurs well for food away from home to continue to gain share from food at home. On slide four, you can see how the recovery trends that I just spoke about have impacted our case volumes for each of our main customer types compared to fiscal year 2019. Since the beginning of 2021, we have seen a steady increase in monthly case volume with our restaurant and hospitality customers. This is highlighted by restaurant case volume exiting the quarter with volume levels that were above 2019. While the industry recovery is certainly part of the story behind our recovering volumes, we are also gaining market share. First, let's talk about restaurants. Chain volume for March and April was ahead of 2019. And for independence, volume for March was flat to 2019 and above 2019 for April. And the positive trend has continued. The Mother's Day week that we just concluded on Saturday had the highest shipment to independent restaurants for our legacy business of any Mother's Day week in five years, with a 6% jump over 2019 Mother's Day week. Yet we know that considerable upside still exists. In markets where local jurisdictions allow more than 50% seating, volume is well ahead of 2019. This includes much of the South and Southeast and a few other geographies. In markets where either less than 50% or less than 25% seating is allowed, like the Northwest, volume is well below 2019. So as restrictions get lifted everywhere, as vaccination rates continue to increase, and as consumer sentiment continues to improve, we expect that all markets to move into positive territory. Hospitality. The hotel portion of our hospitality business is recovering. As leisure travel returns and occupancy rates recover, with occupancy rates now being only 500 basis points below a year ago. We expect this trend to continue. Consumer surveys highlight that travel next to dining at restaurants is one of the top things that consumers are looking forward to doing. Our portfolio of hotel customers leans more towards the leisure side of the industry, positioning us to take advantage of the increase in leisure travel that is expected as the economy reopens. Our healthcare case volumes continue to range steady in the negative 10% range, which is where it has trended for the better part of the last year. Restrictions on visitors of hospitals are just starting to be lifted, and hospital cafeterias are just beginning to reopen. We also expect that occupancy rates at senior living facilities, which have declined a lot over the past year, will start to normalize as vaccination rates increase. Both of these factors, plus recent wins in the healthcare area, will indicate that healthcare case volume will ultimately return to pre-COVID levels, if not higher. For nationally managed customers, which we remember includes national chains, healthcare, and hospitality, you will remember that in 2020, we added $800 million of new customer wins, which is driving some of the increases we are seeing. In the first quarter of 2021, we added $200 million of new customer wins. And our pipeline for the balance of the year is very healthy. Lastly, and for national chains specifically, The contribution margin at which we are signing new customers is well above the average for that portfolio and above the margins associated with recent wins. Turning to page five. As I've discussed, an important factor behind growing case volumes has been the recovery of our industry. But an equally, if not more important factor has been our market share gains across most customer types. The driver of our market share gains continues to be our great food made easy strategy, which aims to help customers succeed by taking advantage of our leading technology, our innovative products, and our team of experts that support our sellers. Let me give a few examples of how our core programs in our strategy have evolved to meet changing customer needs and contribute to recent market share gains. First, on the technology front. Recent research and comments from new customers indicate that our technology platforms still lead the industry. For example, for larger customer wins, like the $1 billion of wins in the last five quarters, we track the main reason why a customer switches to U.S. foods. In many cases, the determining factor is a combination of our technology and our service model. We see that especially with healthcare and large chains where technology makes it easier to manage menus and control costs across multiple locations. Similarly, for independent restaurants, we continue to enhance the functionality to make our technology even easier to use. Some recent enhancements include mobile pay functionality and the ability for customers to see our inventory in real time. This visibility provides real value to customers especially at a time when the industry is experiencing some volatility on the part of manufacturers. Second, on the product innovation side, I mentioned on our last call how COVID has resulted in a shift in the products that customers rely on the most. The three big trends that we observe are off-premise dining, the need to mitigate labor challenges, and products that promote well-being, which includes plant-based products. Our spring scoop, which launched in February, featured products exclusive to U.S. foods that adjust all three of these operator needs. As a result, we saw a trial of these innovative products in line with historical norms, which we know contributes to increased retention and market share gains. Our upcoming summer scoop will similarly feature products that take labor out of the kitchen, especially ingredients or components that require intense preparation. These labor-saving products enable restaurants to maintain interesting options on their menu and continue to add innovation to their menus. We're also expanding our range of products that support the continued growth in off-premise dining, such as tamper-evident packaging and grab-and-go products. Note that our 2020 Corporate Social Responsibility Report was published two weeks ago. This is a comprehensive review of our progress and our three pillars of people, product, and planning. of which our line of 900 served with sustainable products is an important component. The report is available on our website, which I encourage you to visit to learn more about. The third and final part of our Great Food Made Easy strategy is our dedicated team of industry experts that are available to help customers run their business more effectively. Since the beginning of the pandemic, we have had a dedicated team of restaurant operation consultants helping customers access CARES and Restaurant Revitalization Act funding. Starting with our first webinar in April 2020, the team has held weekly webinars and conducted over 7,500 one-on-one consultations to help customers understand and navigate available funding options. We estimate that our team has assisted customers in accessing over $1.5 billion in funding since COVID began. And as early as mid-February, this team was conducting webinars on helping customers be prepared to access the Restaurant Revitalization Fund even before the legislation was signed into law. These efforts are truly making a difference to customers, as illustrated by this email we received from a restaurant owner in St. Louis, which I'd like to read to you now. Quote, The information you supply is a game changer. My payroll company said they found $300,000 between both my businesses. I'm not sure how to thank you. You are literally changing people's lives." This is what we mean by we help you make it. Now moving to slide six. Another key part of our strategy has been the acquisitions of Food Group and Smart Food Service. The Food Group acquisition allowed us to dramatically improve our distribution footprint in the Northwest. giving us a presence in this growing part of the country and making us more attractive to regional and national customers. The acquisition of Smart Food Service enabled us to scale our entry into the cash and carry channel, a more profitable and faster growing channel in the food service industry. Not only does this channel provide a more attractive growth and margin profile, it enables growth and share of wallet with our existing delivered customers while extending our reach to target customers we weren't previously serving. Let's spend a few minutes talking about the progress we have made on the integration of food group and the future growth opportunities Cash and Carry presents. Starting with food group, the warehouse systems conversions are progressing well. Since we last spoke, we have completed two additional conversions, so a total of four, and we're on pace to have all of the food group warehouses converted to U.S. Foods operating system in the second half of this year, in line with our original plan. If you recall, completing the warehouse system conversion is a key enabler to unlocking the $65 million of annual runway synergies. In 2020, we made good progress on synergy capture, especially on the products one. And we remain on track to capture the full 65 million synergies by 2023, with 80% captured by the end of 2022. We've also begun to expand food capabilities around meat and produce to the rest of the U.S. foods network. and we are excited about the enhanced product offering this will bring to customers around the country. The smart food service business continues to outperform our delivery business as it has throughout the pandemic. Same-store sales for April are ahead of 2019 as restaurant demand continues to recover, and we continue to benefit from some direct-to-consumer sales, sales that we are getting without modifying our business model. On our last call, I mentioned that we would be rebranding all smart food service locations to be your food chef store brand. I'm pleased to report that the rebranding effort is now complete and customers have responded well. With the rebranding complete, we have begun to fully leverage the power of combining these two channels by offering both sellers and customers incentives to shop the two channels. As a result, we are seeing delivered customers increase their purchases from Chef's Store with minimal impact on the delivered business. This multi-channel offering is an advantage that no other competitor has access to. Lastly, the conversion to the Chef's Store brand will help facilitate our expansion into new geographic markets in which U.S. Foods has an established presence. Having covered the first two themes of our presentation, first, the continued and expected recovery of our industry, And second, how our scale and differentiation strategy is contributing to driving market share gains. I want to spend just a couple of minutes talking about the current operating environment that I referred to in my opening comments, after which I will turn the call over to Dirk. As I'm sure you're all too familiar, all elements of the value chain are facing labour shortages. We hear of restaurants having to close one day a week to give their staff a break. In some markets, hiring drivers and selectors is taking longer than expected. And lastly, some manufacturers are having trouble meeting the growth in demand. We believe that there are a number of factors contributing to this environment, including workers who have temporary left labor force, extended unemployment, and the remarkable but as yet incomplete progress on the vaccine front. We believe that all these factors will sort themselves out over the next two to three quarters. In the meantime, we are working hard to mitigate these factors so as to meet increasing demand on the part of our customers. First, we have added significant inventory, a 25% increase in days on hand and on order, as well as working very closely with manufacturers. And second, we are making use of one-time sign-on, referral, and retention bonuses to avoid embedding these wage pressures into our cost structure. Lastly, we are pleased with how the recent changes to our operating model that help mitigate some of the supplier and labour pressures the industry is experiencing. You will remember that by reducing the number of regions to four, we freed up some resources, which then shifted to centres of excellence, whose aim is to quickly develop and deploy best practices across the country, which has helped us in this environment. I will now turn the call over to Dirk for discussion of our first quarter financial results and how we have positioned the business for earnings growth.

Thank you, Pietro, and good morning. I'll begin on slide nine where I'll cover a few highlights for the quarter. As Pietro referenced earlier, case volume improved as the first quarter progressed, especially with our restaurant and hospitality customers. This resulted in a corresponding improvement in adjusted EBITDA as we moved through the quarter. These volume trends have continued in the early part of the second quarter as the recovery continues to take shape. When comparing last month's restaurant volume and trends compared to April 2019, independent cases trended modestly ahead while chain cases were well into positive territory. Gross profit per case for the first quarter of 2021 was below Q1 of 2020. However, the recent improvement in case volume has driven an improvement in gross profit per case as our customer and product mix has started to return to pre-COVID levels. Our gross profit per case improved over the course of the first quarter as volume and mix improved. We saw higher product cost inflation in Q1 2021 than we did in prior quarters, which is negatively impacting our gross margin as a percent of sales. Much of the 2.7% product cost inflation we saw in the first quarter was in center of the plate categories and may persist in coming quarters. If you recall, center of the plate items, such as beef and poultry, And some customer contracts are typically priced with a fixed fee per case markup. So when we have higher inflation, gross margin as a percent of sales can compress for these product categories and customers, even if we are making the same amount of gross profit dollars on each case we sell. Comparing to Q1 of 2019 for a moment, Our gross profit per case was negatively impacted by higher freight costs, as well as the continued, albeit improved, negative mixed impact already noted. As our case volume of corresponding mix continued to improve, we expect the gross profit per case will also continue to improve. And when we compare our gross profit per case to 2019, the gap for the first quarter was the smallest it has been since COVID began. Looking ahead, we expect to see continued headwinds in gross profit per case from the tight freight market and expect mix to improve as case volume improves. Although we expect the higher freight costs to be transitory, we do think they will remain a challenge for the next two to three quarters. On OpEx, over the last few quarters, I've spoken about the $180 million of fixed cost savings that we enacted in 2020. These cost savings are contributing to our results, and we are beginning to see the fixed cost leverage return as case volume recovers. We've begun thoughtfully reinvesting some of the 2020 savings back into the business to further enable sales growth and earnings improvement. We're reinvesting approximately $50 million, primarily to support growth in both our local and national selling organizations. as well as within some key areas such as supply chain to further improve our results and customer experience. This equates to roughly two-thirds of the $180 million ultimately flowing through as permanent cost savings. Slide 10 shows our net sales, adjusted gross profit, and our adjusted operating expense results for Q1 of 2021 and 2020. Net sales dollars for the quarter were down slightly compared to the first quarter of 2020, And you'll recall that only the last three weeks of the first quarter of 2020 were heavily impacted by the rapid onset of COVID-19 and the business closures across the country. Adjusted gross profit dollars for the first quarter declined 2.7%, and our adjusted gross margin was down 30 basis points compared to prior year. Freight costs, customer and product mix, and higher product cost inflations were headwinds to adjusted gross margin in the quarter compared to Q1 of 2020. We do expect case volume improvements with independent restaurants, healthcare and hospitality to have a positive impact on our adjusted gross margin going forward. Adjusted operating expenses in the first quarter decreased 2.6% in dollars and improved 30 basis points as a percent of sales. The improvement in adjusted operating expense as a percent of sales is largely due to the cost savings initiatives we've put in place over the past year and the sales inflation impact. On a dollar basis, the reduction in cost is primarily due to lower volume and the cost savings initiatives partially offset by approximately $25 million higher bonus expense in Q1 2021 than Q1 2020. The first quarter of 2020 had a negligible amount of bonus expense. The lower fixed cost base that we operate from today will continue to benefit us as case volume returns, with a larger percentage of gross profit dollars flowing through to the bottom line. We do expect that supply chain cost inflation will be transitory, OPEX, but will be a headwind through 2021. We expect the cost increases to be transitory until the workforce increases and the hiring demand from the recovery subsides, likely later in the year. On slide 11, adjusted EBITDA was $172 million, adjusted net income was $27 million, and adjusted diluted EPS was 12 cents for the first quarter. As I mentioned earlier, adjusted EBITDA improved as we moved through the quarter, and the second quarter has started out very similar to how the first quarter finished. We remained in a gap net loss position for the first quarter and, as a result, are not reflecting the additional shares from the preferred equity transaction in our adjusted diluted EPS number for the quarter. We do expect to return to positive gap net income in the near future and will reflect the additional shares at that time. And as Melissa noted at the beginning, reconciliations of our adjusted numbers are included in the press release and the appendix of the presentation. Just to wrap up, moving to slide 12, Share gains, cost savings initiatives, and the operating model changes have and will continue to improve our effectiveness and our results. These, combined with the leverage from volume returning, have positioned us to take advantage of the recovery and drive earnings growth well into the future. Share gains with both large and small customers since the recovery began last summer have strengthened the top line. And we continue to pursue profitable new business and believe that our differentiated strategy and scale give us an advantage over many of the distributors in our industry. As I mentioned earlier, we do expect some transitory headwinds related to freight and supply chain labor over the next two to three quarters. Our business has historically produced strong operating and free cash flow. As the recovery continues, we expect to return to generating a healthy level of free cash flow, and this cash will be used to reinvest in the business and reduce our outstanding debt balance. In April, we used cash on hand to pay down $150 million of outstanding debt, and we'll continue to make debt paydowns as the recovery unfolds further through 2021. We still expect to operate the business at a two and a half to three times leverage ratio through a combination of improved EBITDA and debt pay down. As Pietro said at the beginning, the recovery is underway, and our second quarter case volume is off to a good start. At this time, it's hard to forecast the precise timing of the recovery, as it may not necessarily progress in a linear manner. But we do see restaurant demand improving as more markets remove restrictions and as warmer weather allows for more outdoor dining in additional parts of the country. As a result, we expect continued improvement in Q2 adjusted EBITDA compared to Q1. Over the last 30 years, customers have shown a consistent preference for eating away from home, and we expect this trend to continue. We're confident about the future of U.S. foods, and the industry. Operator, at this time, we can now open the call for questions.

At this time, if you would like to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 on your telephone keypad. Your first question comes from the line of Kelly Banias from BMO Capital. Your line is open.

Hi, good morning. Thanks for taking our questions. Wondering first just on the comments on freight, if you can help just help us understand the magnitude of the headwinds, how much you're using third-party freight on the spot market versus contract, and just how we should think about modeling that over the next couple quarters.

Sure, Callie. Good morning. This is Dirk. I'll take that. So although we haven't talked about the specific breakouts, we do manage a large portion of our freight is kind of relatively split between where a vendor delivers it using their carrier and where we arrange for delivery either with one of our trucks or contracting directly with third parties. We do use spot rates in a normal environment. It's relatively small. When we use third parties, we do try to contract with them. And then it can be using a little more as you have more volatile environments like we're in now. What I would say is so our teams are not standing still. They're working closely with vendors on opportunities where we can continue to work with them to try to increase their freight allowances, to look within our own four walls on optimizing our freight network. And it is it remains a challenge. You know, it's not a little different, but, you know, kind of same idea as 2018. But what we have seen in cycles over the years is that when you have this tightness, that additional capacity does tend to come into the market over time. And so we're working in the short term to try to mitigate it at the same time. You know, if we see capacity coming back later in the year, we think that'll help as well. So, Remains a challenge, but not something that we expect to be sort of a permanent impact within the industry or our business for the longer term.

Okay, that's very helpful. And just to follow up, maybe just a little bit more color on the decision to reinvest some of the cost savings. I think it was $50 million back into the business. Just a little more color on that thought process and what you expect to get out of that reinvestment.

Sure. So, you know, from the very beginning, we've said that we expect to reinvest a meaningful portion of that. And we've talked about how we expect the majority of the savings to remain permanent. And so today it's providing a little more specificity. And so the reason that we've progressed in recent months and moving ahead on those things is really because A few things. One is we see more opportunity in recent months for market share gains than we did pre-COVID. And we really want to take advantage of that, especially in some markets. So have begun that reinvestment on the local side and then on the national side as well as we see the demand, the pipeline. We've also onboarded a fair amount of business in order to support that effectively. And then to a lesser extent, but does remain an opportunity, you know, really to continue to upgrade some talent in some cases. The new hires are typically not the same individuals, but really is to continue to support growth and accelerate share gains as we move ahead.

Thank you. Thanks, Mike.

Your next question comes from the line of John Glass from Morgan Stanley. You may ask your question.

Hi, thanks very much. Maybe you should just go maybe broader and talk about the cost you've incurred that what you would view as unusual this quarter. So you mentioned freight. Undoubtedly, there's some hiring costs. You talked about some one-time bonuses. What are the unusuals or what you'd view as kind of one-time? And as you exit the quarter, are those costs still accelerating? That is to say, should we expect greater cost pressures in the next couple of quarters? Or is the first quarter kind of representative of where you're running now and you would expect to until this sort of unwinds later in the year?

sure good questions i think that um a couple things i would highlight uh so freight uh as you pointed out you know that's really been embedded for the last uh quarter or so and i think we'll continue in similar magnitudes for at least the next few quarters uh on the gross margin sort of mix continues to be a bit of a headwind although as i mentioned continues to improve as volume comes back on that i think from an opex perspective so the the main uh unusual things And there's not anything necessarily large that I would call out as unusual. There's always some incremental costs from small amounts from some of the storms in February and such. But the things around labor that you're getting at, when we and others talked about hiring in advance because the recovery happened so fast, that was less of an impact in the quarter. And so therefore, some of the retention and hiring, we're seeing a little bit of it in the quarter. We'll see some continued ramp up over the next couple of quarters as we continue to hire additional individuals to support the recovery. So a little bit higher cost, but again, expect most of those to be transitory through the balance of 2021.

If I could just follow up, you talked about some favorable contract rates in categories versus prior. Is there pricing power in this industry? I understand independence, since things are running hot in the economy and restaurants are raising prices, are you able to pass on maybe price increases greater than inflation? And when you now contract, are you getting a bit more wiggle room on pricing, or is that just not the case?

Sure. So I'll maybe break it into local and larger national contract customers. And so on the local side, so with the inflation, to your point, the combination normally in an inflationary environment, you can see some compression when that inflation happens immediately and then it gets passed through. in this environment you have the combination of the inflation with some supply challenges in different categories across the industry not just us so our teams our commercial teams our pricing teams have worked very very closely and have done a really nice job through here of really taking sort of managing that very well to be able to pass through that inflation and gain a little bit of pricing as we've gone through there but again trying to price very fairly to our customers on the national side we've continued this journey over the last few years where uh our national sales team has done a really nice job of really of all the new business that we're bringing in is higher margin than uh typical in those and continue to take advantage of the tighter pricing environment that we remain in so it definitely is uh on those customers a much stronger pricing environment than it was a few years ago And, you know, depending on how certain things play out in the environment today, that, you know, may continue even to a greater extent. But I think that's where Pietro made the comment earlier is, so we try to be priced fairly to our customers. But at the same time, there are things that are different. And we, you know, we work with our customers on things like our service model, our technology, et cetera, that we don't necessarily have to be the cheapest. It's adding the most value to them in the environment we're in. And that's that balance that really helps both of us win. Thank you.

Your next question comes from the line of John Heinbacher from Guggenheim. Can you answer your question?

Let me start with, can you give us a sense of, if you look at drop size, average drop size now that we're starting to cycle COVID, you know, lines per customer, volume per line, when you sort of look at the productivity of the business. So what are you seeing with regard to those? And is drop size up nicely from, you know, maybe where it was a year ago, well, certainly a year ago, but pre-COVID?

Yes, I'll take that. So drop size is up nicely. above what was a year ago, John. That's probably a combination of recovery on the part of demand and also, you know, market share gains and consolidation. It's hard to tell, you know, how much is from each, but we are definitely in March. We saw higher drop sizes compared to a year ago.

Okay. And then maybe take a longer-term view, right? So if you look back, So, you know, pro forma for the acquisitions, right? I think EBITDA was $1.4 billion, give or take. Between synergies and proactive cost reduction, that's, you know, $200 million or so. When you look at where the business can be in, you know, three to five years, you know, A, do you think it's substantially greater than where you were pro forma? And then from a margin perspective, right, can this business be, you know, 50 to 100 basis points more profitable than it was before? pro forma, in part, drop size going up as well. I know it's a long time out there, but conceptually, where do you think this business ends up?

So maybe I'll start, and then, Petra, if you want to add in anything. I think, yes. So, John, to your point, I think you're thinking about it in the right way. So we do think that the business is on a good trajectory now of getting back to that pro forma. And then we think that's, to your point, some of the synergy realization, the other cost saves, as well as the new business wins, really positions the business to grow EBITDA dollars from that base to get to that stronger and higher number over time. and kind of continued EBITDA dollar growth as we've done in recent years. From a margin perspective, as you've seen us pretty consistently do over the last four or five years, we really try to balance. It's focusing on growing EBITDA dollars because that's ultimately what we take to the bank, but really taking advantage of those opportunities where you can create higher margins overall from whether it's drop sizes continued, logistics optimizations, private brands, customer mix, all those kinds of things. And so we do think that continues to give us opportunity for margin improvement on rate as we move ahead. So really both dollars and rate opportunities remain out there. Okay, thank you.

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

Thanks. Good morning. Just following up on that last question, maybe tightening the timeframe a little bit, just want to get a feel for the sales volumes needed in the current environment versus 2019 levels to get back to a say 4% plus adjusted EBITDA margin level, just knowing you have been staffing up and investing ahead of the curve and we're dealing with the tight labor market and freight, just any color here or commentary on recent EBITDA margin run rate exiting the quarter would be helpful.

Sure. So I think that, you know, we're going to stay away from a specific number because as some of our peers have talked about, just, you know, the exact recovery and mix of business as it comes back can have some impacts on there. But what I will tell you is just to kind of build on my last answer is as we get sales volumes truly back to where they were in 2019, we expect that our kind of business should be bigger because of the wins we've had, and we think that that should drive incremental dollars. I think that the other thing that's a little harder to tell in the short term with some of the freight challenges that, again, are more transitory, so if you assume some of those normalize as we get into, say, 2022 and such, we think that as that business and that the core truly recovers, that we get back to that pro forma number and grow from there. So I know it's not as specific as you wanted, but it's really, again, because of the not knowing as an industry exactly how things recover, but we do firmly believe that the business is stronger and can generate more EBITDA on similar sales because of the different actions we've taken and then grow from there with the strong customer wins that we've had over this past year or so.

That makes sense. on the, uh, independent case growth, want to dive deeper behind the drivers, behind the strong rebound. If there's anything specific that stands out and, and I guess just some thoughts on the potential for further acceleration ahead. I mean, as I guess the broader supply chain issues likely create an even wider gap between the haves and have nots and food service distribution. Um, I guess, you know, as some of the, those, the stronger inventory positions, um, able to make deliveries might fare better than those that are a little bit more constrained.

I think the best sign is the fact that April volumes were above 2019, and that's despite the fact that there's still a considerable number of markets, probably around a third around the country that are still at 50% occupancy or maybe even below that. So as those markets recover, we see more upside in terms of then our ability to gain market share. You've hit on some of the things that our scale, which allows us a balance sheet, which allows us to provide better service. We look at our net promoter scores in terms of us versus Our competitors were doing well on that front. So we do see an opportunity in terms of independence to come from both the recovery in some parts of the country as well as continue to gain share. Thank you.

Your next question comes from the line of Lauren Silverman from Credit Suisse. Your line is open.

Thank you. Another question on the independent side. Really nice recovery with the case growth trend positive in April. Can you also better understand the dynamics between new customer acquisition, expansion of wall share, and comp, I guess, declines in the case volume? And then perhaps are you willing to share what percentage of independent customers you're serving today relative to pre-COVID?

I didn't quite catch the whole question, did I?

Sure, I'll start and maybe if you can add on. So I think from overall for us, so our customer counts on the restaurants are still down a little bit compared to 2019, but each month that's going by, it continues to get better. And that's the combination of as more markets and more of our existing customers reopen, as well as the net new customers that our sellers are continuing to bring on board. So We're feeling good about the trajectory that's going. And then Petra mentioned, you know, we've seen some nice basket size increases from customers and really looking to continue to build on that and hold some of those gains. So, you know, overall, both in the right direction, there's always things you can do to continue to improve. And so those are the things that we're focusing on as well. And, Laura, do you mind just repeating your last part of the question about something versus 2019?

Yeah, I was just, I think you had answered it, but I was just, the two kind of parts were understanding the dynamics between what's driving the independent case growth and then second to that, what percentage of independent customers you're serving today versus pre-COVID.

Okay.

I think you addressed both. And just as we think about that business in 2022, 2023, how do you envision the business mix to evolve, if at all, given some of your national wins and independent customer wins as well?

You know, it's harder to tell exactly in 2022 for some of the same reasons that I talked about earlier of not knowing exactly, you know, at what pace hospitality or other recovers. But I think that, you know, over the longer term, let's use... that view we would expect the business to be similar for the shorter term uh some of the wins you've had in change that's probably a little bit higher but as you can see our independents are uh recovering and growing uh pretty quickly and so it you know in that case That's at the high end of the margin spectrum, so that helps over time. So over the longer term, our focus on the target customers is really unchanged, with growing at 2x the market on independence, growing at market on healthcare and hospitality, and then being very opportunistic on chain and other areas. And in this case, with Chain, over this past year or two, been opportunistic. And as I've said a few different times, it's not been about just bringing cases through the door for us. They have to be profitable cases. And the national sales team has done a really nice job of optimizing for that.

Thank you very much. Appreciate the time.

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

Hey guys, good morning. Thanks for all the color. I'm kind of curious on capacity. Can you just talk about where you currently stand from a capacity standpoint, given the challenges you mentioned on the labor side and the inventory side? You've had the best quarter of a quarter improvement case growth-wise relative to your peers here. But I'm just kind of curious as to how you're positioned for the coming months. And do you think that there is some constraint around capacity or whether you'll be able to navigate that.

Okay. So the capacity, you know, really is on two fronts. I think that you referred to one is drivers and selectors, and now we're looking to extend capacity. You know, we're short about I think there's about 1,000 drivers and selectors across the network from where we'd like to be as the recovery continues. And, you know, as I mentioned, we're working really hard to – every week we cut that number down to a number of factors, not just on the monetary side, but to whatever things we're doing to attract – selectors and drivers. I think one of our peers said, these are good jobs, they pay well, they pay good benefits. We're just having to ramp up the hiring machine more quickly and more than we have in the past. As we've said, the recovery has happened really quickly. On the inventory side, I think we are working with our vendors to make sure we have the right inventory reserved, committed to us. Will we have excess capacity in our network? Will we be taking advantage of that? And so, you know, from an inventory perspective, we're doing all the right things, as Dirk said, right, to really serve our existing customers and continue to add customers that are very profitable and accretive to our P&L.

Okay. And then just a follow-up for maybe for Dirk, I guess. How are you guys going to be presenting the convertible preferred? So it looks like the dividend came out of the $0.12 this quarter. I'm just kind of curious because hopefully we're all going to model this correctly now going forward. But how are you going to be presenting adjusted EPS as it relates to the convert? Thank you.

Sure. Yes, as you noted, we did make a change this quarter to show it adjusted diluted for net income, not net income available to common sort of to be a little bit clearer on that. And also so that would be sort of Hopefully we're not in a position of a gap net loss much longer, but while we have that, this would be the way we would show it. What will happen as soon as we return to gap net income, so likely in the coming quarters, is you would not include the dividend and instead would show the roughly 25 million shares in your diluted share count in order to get to a diluted share base. And if you guys have further questions, you can ask Scott and Melissa, but hopefully that helps.

Great. Thank you. Your next question comes from the line of Peter Saleh from BTIG. Your line is open.

Great, and thanks for taking the question. I want to come back to your comment on the increases in off-premise dining, which you guys believe will become more permanent. Can you just give us a sense on what gives you that confidence to see that those sales remain permanent. And is there any difference between chains able to retain those versus independents, or is it kind of broad-based across the segment? Thanks.

Sure. So, look, there was a real spike in off-premise dining during the early part of COVID. I think what I was trying to say was, you know, some big portion of that incremental business will stick. I don't know that all of it sticks. It's hard to tell at this stage, but the assertion is based on talking to customers and also talking to our partners. As you know, we have a good relationship with CalNow, which helps enable off-premise dining. And based on what they've shared with us, it does look like some of it will definitely stick.

Great. And if I could just ask on your customers using your technology, I think you said it's one of the top reasons why customers will switch and use your mobile pay and real-time inventory, which I think could be a real benefit to them. Can you give us a sense on how much of your customer base today is utilizing this technology and what the opportunities still ahead? And how does that compare to 2019 levels?

Sure. So just to clarify, the point I was making in terms of where we track, you know, reason for switching, that was with the large customer wind, and that was a combination of the technology and the service model, which is, you know, one point of contact, consistent offering across all our network. We don't have to negotiate with a different opco for promotions. So I was referring to that part of it. We have historically talked about our e-commerce penetration as being indicative of our technology advantage with respect to smaller local customers, and that I believe that penetration is at or above what was 2019 with local customers.

Thank you very much.

Your next question comes from the line of Jeffrey Bernstein from Barclays. You may ask your question.

Great. Thank you very much. Two questions. One, just on the margins, I think you mentioned that the new business you're acquiring, I think it's now $1 billion over the past five quarters, is with margins well above the portfolio and maybe prior wins. I'm just wondering if you can offer more context on that. maybe what the margin upside is versus the historical or whether or not you think you're able to sustain those higher margin levels with further wins going forward. And then I have one follow-up.

Sure. So just to clarify, the billion dollars is large customer wins, which includes chains, healthcare, and hospitality. I think I specified the more attractive margin profile is coming on the chain side. And You know, that is really a function of the more favorable demand supply environment than a few years ago that Derek referred to. And, you know, we don't anticipate that changing in the foreseeable future.

Okay. And then just the follow-up, as you think about the distribution category and consolidation, I'm just wondering whether you see yourselves or others pursuing more aggressive M&A or whether specific to yourself you might be constrained near term. Obviously, your leverage levels are well above your target. And I know in the past you've talked about outside valuations perhaps desired by potential acquirees or whether or not you're seeing you have your own ongoing integration of your most recent acquisitions that might slow you down. whether any of those reasons would lead you to maybe just prefer to win accounts rather than actually acquiring smaller peers, whether you want to answer that for U.S. food specifically or whether you think it would be consolidation through M&A for the broader category. Any thoughts would be great. Thank you.

sure so i think i'll take that one i think you know for us our top priority for the near term on the m a perspective as i commented before is really about successfully integrating the two very strategic acquisitions that we have done for one for the channel and one for the geography and really getting food group and smart both really well embedded and growing within our core business You know, after those, for us, you know, the near-term focus is after integrating those is really about de-loggering. I would expect over time, you know, that we would continue to see some tuck-in acquisitions, but that's really more where I would expect it to be, you know, like we've done in the past with much, much smaller acquisitions. here and there. But again, I think right now it's a tougher time for the whole industry because of valuations and valuation disconnects. And, you know, the few smaller transactions that have gotten done are more kind of private equity type of transactions there. So over time, again, I would expect us and others to probably continue to do some acquisitions. But, you know, you probably may not see as much at large scale for across the industry as you would have in the past. Thank you.

Your next question goes from the line of Nicole Miller from Piper Sandler. You may ask your question.

Thank you. Good morning. In thinking about the industry more or less being at 2019 levels, if you could just speak very broadly about the industry, getting back to that 50-50 split it was at between grocery eating at home and then restaurants eating out. If we keep pace here, is this more like a six to 12 month catch up, a 12 to 24 month catch up? And is there any reason the industry that you fell into can't get back, I think it's over like $100 billion in sales to even that out?

So Nicole, thanks for the question. Good morning. I think as Derek has mentioned, we feel very confident timing about where things net out. The timing is a little harder. Again, we've seen just how quickly the recovery has happened in the last month or two for a number of reasons. So I think the charts we showed on the traffic, which is the best day we can get at this point between food at home and food away from home, show that the trend is back to where we were um i think the however much of the um off off-premise dining sticks will help add to the level of food away from home that we saw in the past you know we're at 2019 levels despite some markets like the northwest being still fairly handicapped in terms of restrictions So I think we can speak confidently about getting back to or above those levels. The timing and trajectory of that is really harder to say.

Could you talk a little bit, last question, could you talk a little bit about the cuisine categories that are improving? Which ones are improving the most and is there anything that's not keeping pace?

So everything is improving. You know, in the early days of the pandemic, we saw the more The more resilient customer menu types were around Mexican and Italian and QSR. I think of late, we've seen pretty much everything come back in those markets that have few restrictions. And I think that's why we feel good about the health of the industry, right? It's independence, chains, different menu types, all kind of coming back is what we're seeing at this point.

Thank you.

Your next question comes from the line of John Ivanco from J.P. Morgan. You may ask your question.

Hi. Thank you. You're not the only large company that, at least on paper, has basically financed the increase in receivables and inventories with payables. Again, I know that's not what you're doing directly, but that's what the balance sheet shows. Can you comment as to whether that is unique to the largest food service distributors or whether that's also being, seen or realized there's a benefit you know to the regional and smaller operators if there's a way for you to know that because you know obviously working capital build up was you know one of the things you know that we had talked about before is maybe the advantage that the larger distributors would have uh in the smaller ones wouldn't and I have a follow-up as well sure good morning John so as you pointed out so you know I think uh until

the three of us saw payables increases. And at least, you know, in our case, it's not because of anything we're doing different as opposed to just the natural timing of purchases in there. So I would expect the inventory bill to normalize a little more as we get a little, you know, these next couple of quarters. And then, you know, similar with the EAP to normalize as well. I think from a – so there's not anything – I guess, from terms that I would call it that I would think would be different from a larger and smaller. What I would say, though, is you'd have to pay for that inventory, and while you're carrying it, it will have an impact in the nearer term still on cash. And so I think that's where it does advantage someone like us with the scale and the balance sheet strength we have of financing that incremental inventory. And then at the same time, as the industry is growing, your, your receivables are growing. So just the natural build that happens to your point around that, that I think that is where, as we continue to see where other smaller distributors will be challenged as we grow through there, because it is a cash and working capital investment, because as we work through both the recovery plus the supply side challenges that are happening and, you know, as they're, you know, potentially less likely to be able to make some of those investments to mitigate some of those supply challenges. I mean, those are opportunities for us to target those customers and really achieve additional growth from there as well.

Thank you. And then secondly, I would think one of the quote-unquote easier ways for you to win customers from distributors would be to get salespeople and drivers from those distributors. I mean, is that practical? I mean, is that something that you're seeing? Or, you know, are there non-competes or other things that make, you know, make basically, you know, go out and get other people's best employees a more, you know, more sticky proposition?

We definitely see that, you know, now that we've, you know, as Dirk said, we invest a portion of the cost saves in terms of expanding our sales force. I speak to a new class of sales force every month. And there's definitely a portion that comes from, from other competitors, and they're attracted to US Foods by things that have made us attractive in the past as well, you know, our culture, our technology, our products, our team-based selling, all of which kind of gives them the ability to earn more income than they might in other places. And so that definitely is an opportunity that we've taken advantage of.

Thank you.

Your next question comes from the line of Jenna Gennelli from Goldman Sachs. Your line is open.

Hi there. Thanks for getting me in. I just had a question. You spoke about just the technology being such a point of differentiation and helping you gain market share. Should we expect any incremental investment here that's kind of needed or required to keep that industry-leading position? Basically, is there anything else that you'd like to do or need to do? And then just any color on the allocation of CapEx dollars as we think about, you know, 2021 and any investment. Thanks so much.

Sure. Good morning, Sid. Out of the $50 million, a small portion of that is an incremental investment for digital. What I'd say on that one, I mean, that's an area where year in, year out, we've continued to invest in there to be able to add more capability and serve our customers better. So there's not a step change, so to speak, that we need over time. But, again, we are investing a little bit extra there. I think as we think through, and that would be more on the OpEx or P&L side, as we think through capital, not anything big or different that I would call out on our capital for this year. One of the things that I've talked about prior is you will see more cash CapEx in the current year. because we're spending less on fleet this year than in past and more on facilities, and that ebbs and flows from year to year. Sort of our all-in number, when you put those together, isn't all that different. Again, because we, other than the pause last year, one of the things we try to do is consistently make sure we're investing in the business to be able to support the growth across buildings, IT, tech, and fleets.

That's super helpful. And then just one bigger picture question, if I can. Just on the market share gains, can you give us a sense of who you think you're most gaining that share from? Is it from other large players or some of the smaller, more fragmented players? And then when you think about the go forward in your mind, the potential size of the portion of the pie that could be up for grabs, really how meaningful could further market share gains be? And that's all from me. Thank you.

Okay. Look, to be honest, it's hard to tell where the games are coming from. We don't have access to that sort of data. When we talk to the field, it really comes from all places, small and large competitors. It really depends on the local environment and how various players are doing in terms of service and who the makeup of the players is. In terms of the longer-term outlook that you asked about, Overall, we're a tennis share player, maybe a touch below that. So we see lots of opportunity to grow share over time, given our position. We're the number two player, but still a tennis share player, and it's still a very fragmented industry. So we see lots of opportunity to gain share over time.

Thanks so much.

Your next question comes from the line of Jaro Martinson from Jefferies. Your line is open.

Good morning. I just wanted to touch on the rise of ghost kitchens and how you guys are penetrated in that. Talk is that that will continue as we recover. Folks tend to like the economics of that. I just wanted to see where you are positioned there and what the focus is on that side of the market.

Sure. So Ghost Kitchens, we benefit as a distributor, we benefit from the rise of Ghost Kitchens the same way we do commissaries or caterers because they still have to purchase their bulk food from somewhere. And I believe in past calls, we've talked about our Ghost Kitchen playbook that I think we were one of the first ones to come out with. And that's definitely helped existing customers operates out of, you know, get better leverage out of their existing real estate or acquire lower cost real estate to access new customers. You know, Ghost Kitchen Playbook has some analytics built in, some menus built in for different menu types. And, you know, we've had a lot of interest and participation on the part of customers in terms of Ghost Kitchens.

Thank you very much, guys. Appreciate it.

There are no more phone questions. I'll turn that call over to Mr. Pietro Satriano for closing comments.

Thanks, operator. We'll keep it brief with comments. Look, I hope that just to go back to our three takeaways that you can see after this call, the three takeaways that I talked about at the outset, the industry recovery is well underway and we are participating in this recovery in a very meaningful way. Second, our scale and differentiation is driving the market share gains that we have talked about. And third, the continued strengthening of our financial results as the industry continues to recover. Again, I want to take an opportunity to thank all our associates. We really continue to go above and beyond to serve our customers in this environment. We look forward to speaking with everyone at our next earnings call in August. Thanks for tuning in today and have a great day.

This concludes today's conference call.