US Foods Holding Corp.

Thank you for standing by and welcome to the first quarter 2022 earnings call. At this time, all participant lines are in listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Snehal Shah, Senior Director of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Suzanne. Good morning, everyone. Welcome to our first quarter earnings call. On the call today, we have Bob Dekowski, our Executive Chair, Andrew Iacobucci, Interim Chief Executive Officer, and Dirk LoCascio, our Chief Financial Officer. Additionally, like last quarter, Bill Hancock, our Chief Supply Chain Officer, will join for our Q&A session. We will take your questions after our prepared remarks conclude. Please provide your name, your firm, and limit yourself to one question, please. During today's call and unless otherwise stated, we're comparing our first quarter results to the same period in fiscal year 2021. 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 2021 Form 10-K for a detailed discussion of these potential factors that could cause our actual results to differ materially from those anticipated 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, except that we are not providing reconciliations to forward-looking non-GAAP financial measures as indicated therein. I'll now turn the call over to Bob.

Thanks, Nahal, and good morning to everyone. Before we dive into the quarter and the progress on our plan, I want to spend a few minutes on the two announcements we shared earlier this week. We're pleased to have reached an agreement with SACIMHED and bring an end to the proxy contest. The board welcomes Scott Ferguson, David Toye, and Jim Barber as new independent directors and looks forward to their insights and input as we focus on the continued execution of our long-range plan. And as we do, Our chief commercial officer, Andrew Iacobucci, has agreed to step into the interim CEO role as the board conducts a search for a permanent successor to Pietro Satriano, who left the company. On behalf of the entire board, I want to thank Pietro for his dedication and leadership to U.S. Foods over the last 11 years and for guiding the company through the pandemic. We will work with urgency on the search for a permanent CEO successor but take the time needed to find the right person. Andrew joined U.S. Food in 2017 and has been integral to our efforts around driving profitable market share gains and optimizing gross margin, which are two pillars of our long-range plan. He also has worked extensively with Bill Hancock on our supply chain efficiency initiatives in the third optimization pillar. He is a proven leader, and the Board and I are confident the business is in great hands with Andrew at the helm. In my new role as Executive Chair, I look forward to working alongside Andrew and the rest of the management team to ensure that we build on our momentum and maintain our strong execution of our strategic initiatives. On today's call, Dirk will discuss our first quarter results, capital structure, and macroeconomic environment before Andrew walks you through the progress we're making on our long-range plans, as well as our outlook. And as Snehal mentioned, Bill Hancock will join for Q&A session. Finally, I want to thank all of our associates for their focus and commitment to serving our customers and driving U.S. foods performance. With that, I'll turn it over to Dirk.

Thanks, Bob, and good morning. As we outlined a few weeks ago, we delivered strong sales and adjusted EBITDA growth in the first quarter, which reflects the early progress we are making on our initiatives to drive profitable growth, expand margins, and improve operational efficiencies. Both our results and progress underscore our confidence and our ability to deliver 2022 and our balanced long-range plan. Our industry is resilient, and is in the midst of a strong recovery. The work we've done over the past few years has positioned us well to drive continued growth as we leverage our scale and innovation. We will also continue to benefit from new talent we have added to better serve customers and optimize costs, specifically to the supply chain team. By delivering against our plan, we have a clear opportunity to create significant value for shareholders through earnings growth and a disciplined approach to capital allocation. which after investing the business is focused on debt reduction, return of capital to shareholders, and opportunistically pursuing tuck-in M&A. I'll spend a few minutes on our first quarter results in capital structure, although I won't go into as much detail as normal since we previously released our preliminary results on April 21st. I'll also speak to several macro considerations that remain a focus for this year. I'm on slide five. We're very pleased with the strength of our first quarter financial results. Q1 adjusted EBITDA was one of our best quarters relative to 2019 since the pandemic began and demonstrates the early progress of our long range plan initiatives and our commitment to return to and then surpass 2019 results. Q1 net sales were $7.8 billion, which was an increase of 24% over the prior year. Total case volume increased 4% and food cost inflation was 17%. Within volume, we had 9% independent case growth, 64% hospitality growth, and 1% healthcare growth. Our year-over-year case growth was negatively impacted roughly 400 basis points by the mid-2021 exit of the grocery retail business we temporarily added during the pandemic. As you'd expect, January volume meaningfully slowed due to Omicron, and then we saw significant improvement in February and March. So far during the second quarter, we've seen continued improvement in demand. As a reference, our independent case growth in recent weeks has been trending up mid-single digits compared to 2019. Hospitality case growth has continued to improve as well, and in recent weeks has been mid-teens below 2019. As hospitality and healthcare improve from a macro recovery perspective, and our expected new business is realized, combined with the accelerated restaurant case growth, we expect legacy volume to strengthen to 2019 levels later in this year. We produced very strong gross profit dollar growth again this quarter. Our adjusted gross profit dollars increased 24 percent from the prior year, which was more than the 20 percent increase in adjusted operating expense dollars. We progressed on many of our long-range plan initiatives that did and will enable share growth, increase gross margins, and drive OPEX efficiency. which Andrew will talk more about shortly. The progress of our initiatives as well as benefit from food cost inflation resulted in a 40% increase in adjusted EBITDA and a 40 basis point increase in adjusted EBITDA margin compared to prior year first quarter. And finally, our adjusted diluted EPS increased to 36 cents per share. The macro environment remains a challenge for our industry and our customers. Thankfully, Omicron is largely in the rear view mirror and severe COVID cases have declined significantly. Omicron played out in Q1 largely as expected from both the volume and cost impacts. And with summer approaching, we expect demand recovery to continue. Moving to labor, the labor market is better than it was in 2021, however, remains challenging. We continue to hire across our network to address staffing needs resulting from expected continued volume growth. With labor, the primary challenge is retention, which is definitely not unique to us. Turnover is higher than it's been historically, and we've taken several actions to address this, such as limiting hours worked for new hires to ease them into the job, and retraining our frontline supply chain managers and supervisors on effective employee management engagement practices and processes. We're also finishing the deployment of our new selection technology in our warehouses and revising processes leveraging our continuous improvement team to make the jobs a little easier. Retention remains a key focus for us. Moving to productivity, we are making progress, as Q1 was better than Q4, and we remain focused on getting back to 2019 levels, along with increasing retention. Food cost inflation continued in the quarter, with year-over-year inflation of 17.3%, and sequential inflation of just under 3%, which is relevant to our entire industry. Sequential inflation is similar to last quarter and lower than the two quarters before that, which is a positive. Inflation is fairly broad-based across most categories, and we have been successful in passing it through to customers. The quote-unquote experts don't seem to have consensus on how inflation plays out over the balance of the year. Hopefully, the slower sequential inflation is a signal of stabilization. Supply challenges that remain for our industry more broadly don't appear as though they'll be resolved in the near term, but rather it is expected more likely later this year or into 2023. We haven't seen an impact on our demand at this point and are committed to helping our customers manage through this inflationary environment. Higher fuel costs is another form of inflation facing our industry. Fuel is not an insignificant cost for us, however, is not nearly as significant as some of the other costs we incur. As a reference, we spent approximately $125 million on diesel fuel for outbound deliveries in 2021. We mitigate some of the fuel cost risk through locking in cost on a portion of our fuel, which right now is about a quarter of our estimated diesel fuel needs through Q1 of 2023. We also recover a portion of the increases through fuel surcharges to customers. We typically offset approximately 40% of our total fuel cost changes through customer fuel surcharges, and those surcharge amounts vary based on diesel fuel costs. This all means fuel cost is important, however likely isn't going to be the single item that makes or breaks a year, and any impact is likely temporary as fuel costs normalize over time. The macro environment has its challenges, however our business and our industry have strong recovery tailwinds. We are pleased with the strength of our Q1 results, and we expect that our continued progress on our strategic initiatives combined with the macro recovery will lead to further improvement in Q2 EBITDA and a strong fiscal year 2022. We are reaffirming our fiscal 2022 earnings guidance that we provided in February. I talked about earnings and macro. Now I'll spend a minute or two on slide six discussing our capital structure. We reduced our net debt dollars and leverage compared to both first quarter and fourth quarters of 2021. Our net leverage was 4.3 times at the end of the first quarter, which was a 3.2 turn reduction from a year ago and a 0.3 turn reduction from the end of 2021. Leverage reduction is one of the four components we outlined as part of our capital strategy I noted earlier. We continue to make progress toward our leverage goal of 2.5 to 3 times net leverage and are committed to achieving it. In summary, I'm pleased with the progress in Q1. and optimistic about our balanced long-range plan, which Andrew will discuss next. Andrew, over to you.

Thanks, Dirk, and it's great to be here with everyone this morning. I'm truly honored to step into the interim CEO role, and I look forward to working closely with Bob, the management team, and our associates to continue moving our business forward and to build on the success of our first quarter. For the past five years, I've led the company's merchandising operations, and more recently, our broader commercial team, which has allowed me to develop an in-depth knowledge of our customers and of our operations. And as Bob mentioned, I have focused heavily during that time on driving market share and optimizing gross margins, and I've worked very closely with Bill Hancock and this entire supply chain team throughout. This has given me a great perspective on our team, on our capabilities, and on our opportunities going forward. I have to say I could not be more excited about our position in the market and our ability to capitalize on what lies ahead. My focus as interim CEO will be ensuring that we relentlessly focus on executing the plan and continue to build our momentum and not miss a beat in the process. With that, let me walk you through the progress we're making to drive profitable growth, expand margins, and improve our operational efficiencies. I'm now on page 8, which is a recall slide from our February presentation and provides an overview of the long-range plan that we presented. Our plan, which we expect will generate $1.7 billion of adjusted EBITDA in 2024, is balanced across all three pillars. First, profitably growing market share. Second, optimizing gross profit. And third, improving operational efficiency. This plan builds on our solid track record leading up to COVID, especially in market share and gross margins, and brings additional focus to improving operational efficiency thanks to a number of significant changes we made coming out of COVID. First, we brought in considerable new talent. The head of supply chain, head of IT, and the head of our newly created program office are all new, and all three are outstanding additions to our team. Inside supply chain, three quarters of the leadership team is new and brings considerable experience from the outside. Second, we introduced a new operating model in April of 2021 with excellence teams whose sole mandate is to drive standardization and bring additional focus to underperforming markets. These excellence teams are staffed with our best talent and have been an integral part of our success. And third, late last year, we introduced customer prioritization or tiering as a way to provide a differentiated service to our best customers while simultaneously removing waste and inefficiency in our operation. This approach to customer tiering has been proven in other industries and we are beginning to see the benefits of it. Taken together, these three changes represent considerable differences compared to the way we operated in 2018 and 2019 and they undergird our conviction around the long-range plan. I'm now moving to page nine, initiatives to grow market share. Each of pages nine through 11 is set up in the same way, with a recall on the long-range plan goals for this pillar on the top left, Q1 progress on the bottom left, and the key initiatives over the three years on the right. Recall that our goal is to grow 1.5 times the market with restaurants, and this pillar is expected to generate approximately $290 million of incremental EBITDA over the three-year plan. Progress in the first quarter was good, as illustrated by market share gains in key customer types and a 9% increase in independent case volume. I will now highlight a few of the key initiatives that will continue to drive the three-year plan for market share. First, We will drive market share gains by creating a more differentiated service and fresh experience, which our research tells us is a meaningful opportunity. We are using our customer prioritization framework I mentioned earlier to further improve service and to remove waste via our routing initiative. On fresh and in particular produce, we spent all of 2021 enhancing our quality control processes and are now turning our attention to activating this great quality promise with our customers. Early results in our test markets have been very positive. On the larger customer side of the house, our pipeline so far is close to the new business we brought on over the last two years. And these gains are being driven in part by our service model and our technology. An example of this technology is our recently introduced vitals. which helps hospitals manage their menus and their overall costs and has allowed them to gain a 5% improvement in their operating budget in many instances. In addition, our omnichannel strategy will continue to fuel market share gains in the coming years, and we are on track to open four to six new chef stores this year. Now turning to page 10 for a review of our recent results and future initiatives driving our second pillar, optimizing gross margins. Recall that this pillar is expected to contribute approximately $325 million of EBITDA growth over the long-range plan. And as you can see on the bottom left, we've made good progress on all elements of the plan, including pricing, exclusive brand penetration, freight, and passing on inflation. We continue to have good success resetting terms with select less profitable large customers, which is in part the result of a more attractive industry structure than historically. Moreover, new customers are coming in at margins that are much closer to independent restaurants. And lastly, we see continued opportunity to increase private brand penetration. On the cost of goods, we are optimizing our vendor relationships to ensure our terms are in line with our scale. On the freight side, in addition to the progress we've made optimizing vendor allowances and carriers, which is contributing to our first quarter results, we are taking advantage of the opportunity to use our scale to reap greater benefits from backhaul opportunities. Freight income per case was above 2019 in Q1, which is a first since COVID began. Let's move now to page 11 to cover some highlights on improving operational efficiency. Recall that this pillar is expected to contribute approximately $235 million of EBITDA growth over the long-range plan. In the first quarter, we made progress as we gained operating leverage by increasing OpEx less than gross profit increased our selector productivity from Q4 levels and implemented our warehouse selection technology at additional facilities and are on track to be complete by early Q3. We are currently engaged in phase one of our routing optimization initiative. Customer order patterns and mix have changed significantly throughout the recovery and we are in the process of removing wasted miles from our routes while maintaining on-time delivery as indicated by industry-leading net promoter scores. While we are early in the process, our leading markets are achieving a nearly 10% improvement in cases per mile when compared to the same period in 2019. And later this year, we will begin remapping the remapping component of phase one, which will ensure that our customers are serviced by the distribution center that can serve them most efficiently. Later this year, we will begin phase two, and that work will replace our current routing platform with dynamic routing technology and will further drive out wasted miles and improve the customer experience. Our continuous improvement work is focused on aggressively standardizing process, including how we plan for our work, how we execute our work, and how we create the right environment for our associates and leaders to drive safety, service, and cost improvements. As we continue to navigate a competitive labor environment, we are making progress on our network plan that includes analyzing brownfield and greenfield automated solutions. We expect to begin testing brownfield prototypes later this year and will continue to pursue more comprehensive greenfield solutions in parallel with that work. In conclusion, our results are a promising affirmation of our strong early progress in implementing our long-range plan. And I want to thank all of our associates for their continued focus and commitment to our business. Despite continuing challenges impacting our industry, we delivered one of our strongest quarters since the pandemic began, a testament to strong execution by our entire team. I'm excited to lead this great company during this interim period, and I am confident we have a great plan and a great future ahead. Operator, please open up the line for questions.

As a reminder, to ask a question, please press star while on your telephone keypad. And to read our question, please press the pound key. Our first question comes from the line of Lauren Silverman from Credit Suisse. Your line is now open. Thank you so much.

I appreciate it. I wanted to ask about how you see the opportunity to narrow the margin gap to your closest competitor. So with the initiatives that you've laid out across gross margin and OpEx, I guess one, how much of that margin gap do you see as addressable? And two, what do you see as low-hanging fruit or more near-term versus longer-term?

Sure. Good morning, Lauren. This is Dirk. Good question. So we're absolutely focused on understanding our competitors, their performance and benchmark. We're actively working, as we've talked about, to further expand our margins. And I think the key drivers of that are the things that Andrew's talked about and we've talked about in our long-range plan, whether it's the cost of goods improvement, the logistics improvement, supply chain efficiency items we've noted. It's really the key levers there that we've talked about. And we're focused on that balance of expanding the margins and maximizing our EBITDA dollars. We think that especially during this time when the industry is in this state of recovery, that that balance of expanding margins and profitably growing shares is critically important. And overall, our plan may or may not look exactly like competitors, large industry, still collective small share for both of us and a lot of room to run, and we would expect to significantly grow EBITDA over this period, create significant shareholder value with a lot of it coming from improved margins.

Great. And I just want to follow up on inflation. You guys are, it seems like having a lot of success pushing through that inflation. What are you watching in the consumer environment or more broadly to see whether you might decide to delay pushing any of the inflation that you're seeing?

Thanks, Lauren. It's Andrew. Thanks for the question. Yeah, we are paying very close attention to the impact of inflation in our world. We're seeing it everywhere, not just obviously in our industry. So far, we are not seeing any meaningful impact on demand. We also are, I think, being buoyed by what continues to be a post-COVID sort of recovery and the pent-up demand that comes with that. But we are expecting it to continue, and we are continuing to monitor it very closely. We are also taking pretty aggressive steps to manage and help our customers, that is, manage through this difficult time. Our rocks and our food fanatic chefs have spent a great deal of time with our customers, helping them understand how to rebuild their menus to get away from heavily inflation-impacted categories, rejigging their recipes in the process, and also looking at opportunities to engineer their menus to pass along that inflation to their customers. and those have had significant positive impact on our customers.

Great. Thank you so much.

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

Good morning, guys. Hi, guys. Good morning. Bob, I wanted to ask you a question, you know, just to start. You know, change looks to be coming, right, because you're embarking on a new CEO search. Just curious, what's the board looking for in an ideal candidate? You know, what's important in that decision? And then, you know, things look to be in capable hands with Andrew, you know, at the moment. Does anything change in terms of implementation of the strategy that's out there?

Yeah, thanks, Ed. So I'll answer your questions in reverse order. I would say, first off, One of the reasons the board has so much confidence in Andrew taking over is he was integral in the building of the long range plan. And so our view right now is we just want to execute against the plan that's in place. The strategy is sound and the plan, the plan metrics are sound and the first quarter validates that we're on the right track. So in the short term, I wouldn't look for anything other than Andrew focusing on execution of the strategy and the plan that's in place. The second question about the ideal candidate, I'll tell you that we've already formed the search committee. The search committee is already engaged, and it's a top priority of the board and of mine to find the next good leader for this company. You could write down the specs as easily as I could. The person needs to have some industry experience. They need to have been in the supply chain business. And the experience of leadership and C-suite experience is an important element that we'll look for. But at this moment, it's an open palette in terms of the person that will step in. We have some very, very experienced directors on the search committee, and we're excited to bring in the next great leader of this company.

Great. And then just one quick follow-up for Dirk. You know, both your peers raised guidance this quarter, Dirk, you know, albeit they have one quarter to go. You know, you reiterated despite, I think, what was, you know, probably a little bit better than expected Q&A results. Any thoughts, like has anything changed about your expectation for, you know, the remainder of the year?

Thanks, Ed. So as I said earlier, pleased with Q1 and the progress, and our expectation still is to be at the high end of the range, assuming that we don't have another Omicron-like wave. Really, for us, it's what you said. It's early in the year. We're one quarter in. Also, it's relative to other quarters, a relatively lower earning quarter. There are still some macro uncertainties, and we have three quarters. Others have one quarter. So There's nothing to be read into there on our confidence. We remain very confident and we'll adjust as appropriate going forward, but bullish on the momentum.

Thank you.

Our next question comes from the line of Jake Bartlett from Truist Securities. Your line is now open.

Great. Thanks for taking the question. Mine is about a little more detail, if you could, about just the cost buckets within operating expense. I think going back to the 2018 investor day, you mentioned that 15% was administrative, 55% was supply chain, 30% selling. I wonder if you can just give us an updated, you know, buckets now. And then also, you know, any other detail within that supply chain of how much is labor or any other detail, just as we kind of, you know, assess your ability to cut some of those costs.

Sure, Jake, good question. So our overall percentage isn't all that different than it was a few years ago. So those are still good proxies to use. And I think the other piece that I would add within supply chain that we've talked about in the past is we do spend more on delivery than we do warehouse. So the lion's share of those costs are people costs, and then delivery is bigger. I think the only other thing I'd go back to is in supply chain, if you look at historically, I talked earlier about using 2021 as an example of how much we spend on fuel. I think that's just important because that is a piece that is not labor that helps you tease that part out there. And that's the part that I think it's important to understand that it's meaningful, but it's not near as significant as other expense buckets and that it would likely normalize over time.

Got it. Just a quick follow-up. You gave us the expected savings over the next few years in You know, in gross margins and operating efficiencies, which would you say come first? Just just any any clarity on kind of what's the most low hanging fruit? Is it on the on the gross margin side or or on the operating expense efficiencies that you're targeting?

Yeah, Jake, thanks. It's Andrew. I think thanks for the question. Look, we built this plan quite intentionally to be balanced across all three pillars. And what I think is most encouraging about our first quarter is that we saw really strong improvement across all three. And our plan is to continue to drive all three in equal. So I would not say there is a first among equals on this list. And we are working actually very closely together to ensure that that balance continues.

Great. Thank you very much.

The next question comes from the line of Alex Legle from Jefferies. Your line is now open.

Thank you. Good morning. I just wanted to ask about the resiliency of your business and sort of if you could frame the landscape for independent restaurants and your exposure to this category in the event of a material slowdown in consumer spending. Just curious how things have changed since past big downturns in terms of the capabilities these operators have, leveraging what U.S. Foods offers now, and then the position of your business as an even more important and in-demand supplier, just given the broader issues, getting product and reliable service, and to the extent you think that share gain there could help offset the potential slowdown in spending.

Yeah, I think to answer the last part of your question first, I think that is a big opportunity regardless of the environment that we're in. As Dirk mentioned, it's a large market we play in and quite fragmented, and we continue to see opportunity to grow market share and we'll pursue that. As far as the resiliency goes, we've seen some data from Technomic and others that show that consumer spending, even during downturn, tends to stay quite consistent. What you see instead is is a change in the mix of their spending behavior, that food out of home, those stays at a relatively consistent level. The good news about our business is we've got such diversification across all segments in our industry, and that diversification I think puts us in a very good position to manage through if there is a change in those demand behaviors. The other thing I would say is that COVID has taught us a lot about moving nimbly into where the market is moving, and we, I think, are very, very well positioned to take advantage of that should we see a slowdown.

Got it. Thank you.

Next question comes from the line of Nicole Miller from Piper Sandler. Your line is now open.

Thank you so much. Good morning. A couple of quick ones. There's been some hires that you mentioned, and that was helpful to review that. And obviously, you know, a new CEO can can set some tone and tenor. But that being said, can you just talk about like where everybody sits today, how they interact day to day? You know, is everybody together under the headquarter facility building? How's that coming together?

Yeah, thanks, Nicole, for the question. So we are in the process of returning to work in a sort of hybrid fashion. So physically we are together on a regular basis throughout the month. But the team is, in terms of the coherence and the sort of working together attitude of the organization, I think we've seen a real step up with the new additions. We've had, as I mentioned, not only really, I think, strong improvements to our IT with the addition of John Tonneson, as well as our Chief Supply Chain Officer, Bill Hancock, and then the program office I mentioned. All three have made, I think, a very meaningful impact, not only on their functions, but also on our coherence and cohesiveness as a team. I also mentioned in my remarks that Bill has made very significant supply chain additions He has an extensive network from his time in retail and in tire distribution that he's tapped incredibly effectively into. And every single one of the hires that he has made has meaningfully improved our capabilities in those areas. So we're very, very excited about the team and its ability to move forward.

And, Nicole, this is Bob. I'll just add, you've seen that we added two supply chain teams. deeply rooted supply chain skills to our board in Jim Barber and Quinton Roach. Both of them bring extensive skills, extensive experience, and an extensive Rolodex. And so we're excited to have that additional capability at the board level to enhance Bill's efforts around the supply chain.

Thank you for that. Maybe switching gears to capital deployment, this is an excellent plan, at least, you know, On paper, at the very least, we can put all the pieces together, right? And thinking specifically about capital deployment and the deleveraging effect of the plan. But at which phase do you start to think about share repurchase and dividend? With a permanent CEO or after phase one, two, or three, how are you thinking about that?

Sure. Thank you. Good question. So as you notice, we have four very clearly defined capital priorities that I talked about earlier, and one of them is share repurchase. So our near term is really focused on investing in the business for growth and delivering making very good progress. And as I talked about before, we expect to reach that range of two and a half to three times leverage next year. And so what we will be doing over the course of this year is doing the work to get ready and evaluate the different options for share return of capital to shareholders. and would expect to talk further about that later this year and into early next year. So excited about the opportunity. We have strong, growing cash flow in our business that allows us to really deploy that capital in different ways, including back to shareholders.

And then just a final one. This is more of a curiosity. On the cash and carry business, what trends are you seeing there? I'm trying to think through, does that business go up because of recession? Is there any signal with that business, that piece of business?

Yeah, thanks, Nicole, for the question. We certainly saw a sizable bump in their business during the early and mid-stages of COVID, and that was a combination of factors obviously driving that. It's a very well-priced, very cost-effective option for many of our customers, and I think what you'll see in the event of a slowdown is that that becomes a more and more viable option for our customer base And so we expect it to be very resilient in whatever macro environment we're playing in.

Thank you very much.

Next question comes from the line of Jeffrey Bernstein from Barclays.

Great. Thank you very much. Two questions. One just on the market share opportunity, which I think is the first bucket of the, seemingly the funnel that helps with the other two from the EBITDA expansion opportunity. Just wondering if you were to flash forward three years, it would seem like the current period as we move through COVID would offer a significant opportunity from a market share perspective. So I'm just wondering as you look at your business, how you'd prioritize the buckets in terms of picking up new accounts, further penetrating existing accounts, maybe M&A of smaller competitors or in fact closure of those competitors, like how would you prioritize the biggest opportunities to drive that first bucket in terms of market share growth?

Yeah, Jeff, it's Andrew. Thanks for the question. The short answer is we actually want to be looking at both penetrating existing customers as well as driving new. When we are in balance across those two priorities, we see very, very strong growth and market share performance. Obviously, the more we can build share of wallet of our existing customers, those are very profitable cases given that we're not stopping the truck anymore and the marginal cost to deliver is very, very low. But we also need to be always on the lookout for new opportunities to grow our business through new. And one of the things I think was most promising about our Q1 results is that we saw both of those in balance in Q1.

In terms of the smaller competitive set, it seems like we're hearing about all the challenges of the past year or so of the biggest players. I'm just wondering, the ability for the small and mid-sized players to survive and thrive through this period, it would seem like they would be under significant pressure. I'm just wondering if that's something you can see or whether there's any industry data that would demonstrate that.

Thanks for the question. We don't really have a clear sense of that. Obviously, Jeff, our shared data tells us how we're doing relative to the market, doesn't give us the specifics around where it's coming from. But we certainly have seen a pretty strong balance in where we believe that growth is coming from, from both smaller players, but also from our larger competitors.

It's been very, very balanced. I think the other thing, Jeff, what we see is on large customers, it really has raised over these last couple years the importance of a scaled, solid, reliable distribution partner. And that's really one of the things combined with our service model and technology that has really opened the door to a lot of this growth on the larger national customers and even on the independents, the resilience, the ability to manage through a far less than ideal vendor supply situation with independents. Andrew talked about Q1 that we gained share with our target customer types. Our early read on April is with independents. We had very good share growth again. So I think as Andrew talked about in his prepared comments, just very good momentum building on that.

And just lastly, you give good color from a commodity inflation standpoint and outlook there. Just wondering if I can get your thoughts from a labor standpoint. I think you made mention of the environment improving. I'm just wondering whether there's any quantification in terms of shortages or maybe basket inflation that you might be seeing or, you know, the turnover or hiring, any kind of metrics you can provide to demonstrate that maybe things have topped out and you're starting to see some improvement? Thank you.

Yeah, Jeffrey, this is Bill. I appreciate the question. You know, in our industry, the best way to offset, you know, the labor challenges is to get more productive, and we've done that from the fourth quarter into the first, and we're continuing to see consistent month-over-month improvement on that Turnover is the biggest headwind I think any company has right now in terms of driving additional productivity. And that's why, you know, like Andrew mentioned earlier, our CI efforts, continuous improvement, are focused on how we onboard associates, how we schedule that team, and the technology that they interface with. We finished a very large proof of delivery device deployment for our drivers. It helps onboard them faster, helps them be more productive. And then inside the warehouse by midpoint this year, We'll have fully deployed a new selection technology, both software and hardware, that both helps onboard faster and helps that team be more productive. We are seeing stabilization in the labor markets. The one call out I would have there is Class A drivers. That challenge is not going away for anyone anytime soon, which is why we're continuing to invest into training our own, building our own pipeline. We are offering new jobs to folks that don't have a Class A today. We'll put them through a school. We'll make sure they get full training and then offer them that full-time job right after that so they can join the team.

Great. Thank you. Best of luck.

Next question comes from the line of Brian Mullen from Doja Bank.

Hey, thank you. Just a question on vendor management. Your presentation talks about optimizing terms in line with your purchasing scale. I'm just wondering if you could build on that a little bit. It kind of makes it sound like your current terms with vendors are perhaps not in line with where they should be today, but I'm not sure if that's right or what the magnitude is. So you just speak to the magnitude of that opportunity and maybe what the timeline is to start to realize the benefits.

Yeah, thanks, Brian. It's Andrew. Yeah, so we see it really more as a hygiene play to continue to make sure that we're examining our cost of goods With all the supply disruptions and the demand volatility that we've seen, we have a very different looking mix of products than we have in the past. We think there's an opportunity to make sure that we are really focused around our cost of goods in those new categories and segments to make sure that we are consistent with where we believe we should be. But there's also a bigger opportunity there, which is to find real win-win opportunities for both ourselves and our supplier community. So it's really more in the spirit of partnership that we enter these conversations to find ways to make ourselves lower cost to serve and in return achieve a much better cost of goods.

Okay, thanks. Just to follow up on another initiative, you know, the routing improvements, you know, it looks like expanded from a pilot to enterprise-wide implementation. Just give a little bit of history there. You know, when did those pilots start? What did you see that encouraged you to move forward enterprise-wide? Just the sense of the magnitude of that opportunity and the timeline until when you feel like it's fully deployed and you're seeing the full benefits.

Yeah, like Andrew mentioned earlier, this is Bill, by the way, it's kind of a two-phase project. Phase one is looking at our current routing system and what waste exists. As we've taken new share and customer patterns have changed throughout COVID, it's created opportunities where there's waste inside of our routing. So that first phase that we're in right now is focused on ripping out those wasted miles. Our leading markets are seeing 10% or greater improvement on cases per mile versus that same time period in 2019, and we think there's additional upside on top of that. So that work is ongoing right now, delivering results to the bottom line. That remapping effort, that kicks off here in just a couple of months. We'll have that fully deployed by the close of this year, and that's an opportunity to make sure that as we've brought on those new customers, they're mapped to the most efficient DC in terms of mileage and service levels. Both our internal and NPS data validates that the service levels we're providing as we go through this are as good, if not better, than they were in 2019. Thank you.

Next question comes from the line of Peter Soli from VTIG.

Great, thanks. I want to come back to the conversation around the hospitality business, I guess, at least in the first quarter. I think that's still Dan Bauschner- Down in terms of case volumes, maybe 15 20% versus pre pandemic, can you give us a sense on how many of your customers pre pandemic we have reordered is this just a function of. Dan Bauschner- The function of lost customers are just smaller basket sizes from the customers that are ordering just trying to understand how that segment recovers back to pre pandemic levels thanks.

Morning, Peter. I think that to your right, down in the mid-teens, and have seen continued improvement there. You probably remember that this business was down 70%, 80% right after COVID, so it's taken a little longer, but seeing steady. Leisure had returned a little sooner. I think the encouraging thing is seeing business travel return. A number of the airlines, cruise lines, et cetera, all had comments on both leisure and business that were positive. So we feel good about that trajectory. I think that... We're not seeing so much fewer customers as opposed to, as customers, a few things as you have conferences and things like that that haven't fully returned from a business perspective, as you have operators that are kind of working to get their staffing levels to the right place so they can open all of their dining venues and expand hours, et cetera. So I would expect that to continue to improve. And at this point, it appears as though the demand remains quite robust and the improvements to continue likely from a macro perspective. And then our sales team continues to focus on onboarding new customers. And that's really across each of our customer types. So we're bullish on a continued recovery for hospitality.

Great. And then just on the private label mix, can you just provide an update on where you are today? And are you seeing any more shift as your restaurant partners maybe trying to avoid some of the higher inflation? Are they Are they considering more private label brands or what's the dynamic going on there? Thank you.

Yeah, thanks Peter. It's Andrew. We see our private label mix is roughly where we were in 2019. We've seen a nice recovery back to that. We've had obviously significant supply issues during the pandemic that resulted in order to ensure we were getting product in us, consolidating some of our private label offering. we are seeing that coming back very, very quickly. And we are absolutely seeing the trend that you anticipated, which is as a result of inflation, there is even greater value in our private label brands than there was before, which is seeing a really strong move into those brands. The other factor that's an important contributor to that is that because supply has been so difficult throughout the pandemic, many of our customers are much more willing to try alternatives than they were before. And so we are seeing that as a real enabler of those conversions.

Thank you very much.

Next question comes from the line of John Heinbockel from Guggenheim Partners.

So let me start maybe for both Andrew and Bill. How far can you push the envelope on existing warehouse automation from a cost and disruption standpoint? And then secondly, it's much easier with Greenfield to put it in in the first place. What do you think the network looks like, I don't know, three to five years from now? Maybe a few fewer, but you also want to stay close to your customers. So how does the network evolve?

Yeah, John, this is Bill. Great question. You know, when we think about automation, it really is a dual path, both brownfield and greenfield. Andrew mentioned earlier, you know, our work on the brownfield side is coming first. We see the biggest opportunity to retrofit existing facilities versus greenfield. And that's why we're bringing our first brownfield testing online by the close of this year. And we look forward to sharing some additional results with that later on. On the greenfield side, that work is happening in parallel. With our network plan, we've identified those focus markets. where we feel like we're going to be capacity constrained in the years to come and creates really good opportunity for us to invest in a greenfield site and if we're going to invest in a greenfield site we want to fully explore what a automated solution looks like okay and then secondly right you talked about fresh leadership maybe some sense of fresh market share versus non-fresh

Right. And I and I know one of the challenges has been perception wise. Right. Taking share from specialty operators on the perception that this is not just you. It's all the broad liners on product quality. So, you know, talk about getting over that hurdle and where your share is and how fast that business can grow. Yeah, thanks, John.

You've hit on what I think is a really big opportunity for us. And as I mentioned in my opening remarks, one of the things we took the better part of last year to focus on was just getting our produce quality consistent day in and day out. We have put in a quite significant process as well as technology enablement. that I think has allowed us to be as good as anyone out there. And we have now started to stand behind that through a customer activation pilot we have going in a couple of our markets. And that is showing really, really strong results. We have slightly lower share in produce, but actually slightly higher share in center of plate. So there's a big opportunity to grow that produce business, but both will benefit from that relentless focus on quality. Customers, if they can count on getting high-quality product day in and day out, really, really is a huge source of loyalty and a great way to onboard new business. And so we're feeling very good about the progress we've made on that front.

Okay, thank you.

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

Hi, good morning. Thanks for taking our questions. I wanted to just maybe ask about the long-range plan. Clearly, this was outlined in February, and it sounds like you're happy with the early progress and are backing that today. But with a lot of leadership changes, I'm just wondering if you can comment, should investors take comfort that this plan is the best route forward for the company? Is there broad support for the long-range plan? Does it need to be more aggressive or it's just new leadership to execute that at the highest level? Just anything you can comment there.

Sure, Kelly. It's Bob. I'll try to answer that question. You know, the long-range plan took almost a year to come together. We waited until we got outside the impacts of COVID where we felt comfortable to articulate it. But it was very much of an iterative, bottoms-up-based plan. And so consequently, it's impact and it's rooted all the way down through the organization. Having said that, we're also going to remain very flexible to adjust it as the markets change, as the dynamics change. As Dirk described, the fuel issues that exist today, they weren't on the radar when we were building the plan. We've adjusted. And so we'll continue to adjust to the realities of the market and the realities of the environment. And we're comfortable that the way it's built, it gives us the flexibility to adapt. As well as now, you know, we have some new voices in the boardroom that can have an influence and an impact on and really add value to the formation and the execution of the plan. So we're comfortable that we will remain very agile as the time unfolds, but we believe the three fundamental pillars of the plan are exactly the right ones to grow this business and create shareholder value.

Great. And maybe just to follow up, the new operating model, sounds like that's been in place for over a year now. Maybe just can you help us understand how that's been working, any examples, any tweaks along the way as you have gotten feedback on how that's working and maybe just bigger picture, how does that new operating model compare to the industry if there's any industry standard or norm?

Yeah, Kelly, thanks for the question. I guess I'd answer that in a couple ways. The first, really the core to this adjustment that we made in implementing the new model was to create these excellence organizations on both the commercial team as well as on Bill's supply chain team. And they are seasoned pros, mostly from the field, who really understand the field and how it operates. And what they are allowing us to do in a way that we've not been able to do anywhere near as successfully before is that they identify, they document, and then they deploy best practices from around the country, across the country. So a really good example of that has been a big part of why we've seen such strong market share growth is something we call the recipe, which is our focused attention around where growth is in the market and allowing us to direct our sellers focus into the menu types that are growing in their area and go after those with relentless execution. Another good example, Bill, you may want to talk about is around some of the work you did on the supply chain side.

Yeah, Kelly, when you think about this new operating model, you pull that expertise from the field, you identify what market in the field is best in class at a specific function, and you try to replicate that for the organization. Two quick examples, one being our assortment work. We identified our market that's most efficient with their assortment, and that ultimately led to driving a 15% reduction in SKUs across the network. Much more efficient on the supply chain side, we reduced spoilage, we reduced that redundancy, makes it easier to execute the business. And then flipping over to the routing side that routing initiative was built by these excellence teams we identified the market that the best in class inside of our network and we've replicated that behavior to get that 10% improvement we addressed.

Our next question comes from the line of Mark Carden from UBS.

Good morning. Thanks a lot for taking my questions. So it sounds like there's been minimal demand destruction today with inflation. Do you guys think this is more due to consumers simply wanting to get out more now that COVID restrictions have softened? Or is it still more of a factor of pent-up demand from restaurants just not having enough labor to operate at desired capacities?

Andrew, thanks for the question, Mark. No, I think it's more the former than the latter. I think what we're seeing is a strong desire from consumers to get back to normal in many aspects of their life, and dining out is a big part of that.

Great. And then as a follow-up, how's the current environment impacting demand for some of your specialized consulting services? Could these be materially accreted to margins, or is the bigger benefit just coming from customer loyalty?

It's both. It's probably more on the customer loyalty side. We have done, I think, just some incredible work over the course of the pandemic of both identifying sort of major challenges that our operators are facing and then quickly deploying support and resources against those. The examples abound, whether it's ghost kitchens, whether it's navigating the CARES Act, And then most recently, the tools I mentioned around managing inflation, all those things I have no hesitation saying are industry leading, both in terms of their value, but also in terms of how quickly we've been able to get them up and running. It's a big part of, I think, what our advantage is in the market and something we're going to continue to leverage. Great. Thanks so much and good luck.

Thank you.

Ladies and gentlemen, we still have time for two more questions. The next question comes from the line of John Glass from Morgan Stanley.

Thanks very much. My question goes back to comments a couple of questions ago about operating performance in best practices. Is there a big operating performance difference among regions or among sites? In other words, when you look at the system, are there regions that are lower and therefore can be brought up? to the system average and maybe inside of that, can you just talk about SGA and their margins and where are they relative to when you purchase them and is that an opportunity still?

Sure. Thanks, John. I'll touch quickly from a commercial standpoint. What we've seen is not so much systematic differences, but just opportunities to get better. In any large group, there's going to be a period of distribution and that's what we see in our markets. So the opportunity really is to take those strong performers, learn what they're doing differently, and deploy those to the markets that are not performing as strongly.

Okay, and SGA. Yeah, just on Don, good morning, on that question. So the SGA or food group, so their EBITDA margins were a little bit lower than the broad line when we first bought them. That business, I would say, it's performing well in light of the current environment. So from the northwest and west has been a little slower to recovery, but we expect that to continue to recover. And in those markets, food group has been predominantly number one or number two in share, and we expect to build upon that as we go ahead. I think the other thing is we've talked a lot about, so our integration from a system perspective is done. We've completed our last facility here in the first quarter. That's going very well. Synergies are well on track for the $65 million that we talked about we achieved. We talked about more than $40 million last year. So all in, pleased with how that progress is going on that key strategic asset. And just as the team continues to work there through the macro recovery plus really driving share gains, we think that's going to continue to be an increased value driver for us.

Thank you for that. And where are you on this pricing tool implementation? It sounded like there was maybe some activity-based pricing such that you could charge customers differently depending on how much labor and trucking is required. Where are you rolling that out, and is that the right way to think about this pricing tool?

Thanks, John. So we are on track for deployment starting later this year and into early next, and we're feeling very good about the capabilities that it will provide us with.

Okay. Thank you.

The next question comes from the line of Andrew Wolfe from CL King.

Hi. Thank you. Can you provide some more color around the better pricing and terms you spoke about earlier in the call? I think you said with existing large customers, new large customers, I presume that's chains or maybe others. Why is this happening now, and how durable do you think this is?

Sure. Good morning. This is Dirk. I'll take that one. So that comment is geared sort of more to some of the larger customers. And as we've talked about really for the last number of quarters, so it's not really a new specifically, it's really making sure that a number of those customers that tend to be at the lower end of the profitability that we're aligning their margins with the current operating environment. And so it's working closely with those customers. And in a number of cases, it can be increases in what we charge them, but there's also, it's a pretty complete work with them. It can be things like adjusting a delivery frequency. It can be having them align on more of our own private branch, which saves them money. So things like that that are all about the dynamics. We think it is pretty durable. Sort of the demand and capacity in the industry is very different than it was three or four years ago. And in each case, really what it's doing is I can think of a few larger customers where this environment has built some of the best relationships collaboratively between the two teams. that we've had historically and it's sort of geared around success for both. So I think it's durable and expect to continue to work with customers on that.

Great. I just have a slight follow-up, different question though. If I did my math right, it looks like mix contributed maybe a couple percent or 3% to sales. I just want to check that. And, you know, it's interesting that in an inflationary environment, you know, there's a contribution from mix. I presume it's, well, I actually want to ask you why it is, but, I think there's some sense that, you know, restaurants are getting more confident in adding more fancy items. But, you know, could you give us a color on that? And also, like, you know, a lot of that could, you know, normally in an inflationary environment, you see mix go the other way. So it's just kind of a confounding trend.

Yeah, so this is similar to what we've seen in the last few quarters. You're right, it is about 3%. And a lot of that has to do with Just our independent case growth. As you continue to see that outpace the business and the success we've had, that's a place where it shows up as a proof point that it is real and we are growing faster than the market on that. Andrew commented earlier in either one of his answers or a prepared comment that we really haven't seen systemic trade downs in there yet. We see demand remain robust. And so, you know, overall feel good about the demand environment. And, yeah, that's really what's driving a lot of the mixed benefit.

Got it. Thank you.

There are no questions at this time. I am now turning the call back to Bob Tucholsky.

Thank you, Operator. So let me just quickly summarize. Thank you for your interest and your questions this morning. I would summarize on a couple of points. The first is we're pleased with the quarter that we just announced. But much more importantly, we're excited about the opportunity to continue to drive our long-range plan. We believe our strategy is correct. And this quarter just begins to validate that our actions are going to deliver shareholder creation and shareholder value. And that's really what we're focused on as we move forward. A large thanks to my colleagues in U.S. Food for their great work, and thank you again for your time this morning.

This concludes today's conference call. You may now disconnect.