US Foods Holding Corp.

Good day and welcome to the 2022 Quarterly Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Snehal Shah. Please go ahead, sir.

Thank you, Tracy. Good morning, everyone, and welcome to U.S. Foods' second quarter earnings call. Speaking on the call today, we have Andrew Iacobucci, Interim Chief Executive Officer and Dirk LoCascio, our Chief Financial Officer. Additionally, Bob Dokowski, our Executive Chair, 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. Our earnings release issued earlier this morning and today's presentation slides can be accessed on the investor relations page of our website. During today's call and unless otherwise stated, we're comparing our second quarter results to the same period in fiscal year 2021. 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. Thank you for your interest in U.S. Foods, and I will now turn the call over to Andrew.

Thanks, Nehal, and good morning, everyone. Thank you so much for joining our call. As I mentioned last quarter, my commitment as interim CEO is to continue the momentum coming out of our first quarter and to deliver on our long-range plan, which we introduced in February. Today, I'm pleased to report that U.S. Foods continues to make progress against our plan and delivered strong earnings growth in the second quarter. Let's turn to page three, where you will find three key takeaways from the quarter. First, our Q2 results demonstrate good progress on executing our long-range plan. I'd like to thank our hardworking associates across the country for being a critical part of this progress and for continuing to serve our customers despite the challenges facing our industry. Second, U.S. Foods continued its market share momentum from Q1, again delivering market share gains in key customer types. And third, our results further reinforce our confidence to deliver strong results despite the challenging macro environment affecting our industry. While U.S. foods and the industry as a whole continue to face headwinds related to inflation and food costs and fuel, as well as a challenging labor market, we remain well positioned to win in this marketplace. On page four, you will see key highlights from the second quarter. First, net sales for the quarter grew at 15% year over year, and we saw continued gross profit per case strength, driven in large part by progress on our long-range plan initiatives that we will discuss momentarily. As a result, adjusted EBITDA grew 11% on the quarter. On supply chain optimization, we continued to make significant strides as a result of the investments we were making in the business. We continued the implementation of new warehouse selection technology in our facilities, and we're on track to complete this in September. Additionally, freight income per case continues to gain momentum as our inbound logistics initiatives progress. Lastly, we're driving month-over-month improvement in our service levels to customers while operating in a very challenging and fairly stagnant vendor supply environment. Our customer service levels, although still just shy of pre-pandemic levels, have improved nearly 120 basis points through the start of the year. Moving on, we continue to invest in enhancing the customer experience. U.S. Foods has led the industry for over 10 years in this area, and digital is paramount to our success. We are launching our next generation digital tool, which we call Moxie, which is all about increased speed, confidence, and control for our customers. This is a step change to the customer experience from a performance and ease of use perspective. Moxie will begin rolling out in the third quarter, and we are excited to bring you more updates in the coming quarters. In Q2, we continue to expand our chef store footprint, as well as assortment on our US Foods Direct online marketplace. And last but not least, our team-based selling approach and value-added services continue to be differentiators and are helping us drive share gains in key customer types. A recent example is renewing our strategic partnership with Toast. This collaboration demonstrates our commitment to building deeper relationships with our customers by providing the right technology solutions to save time and improve the customer experience. Finally, I want to focus on the significant continued progress that we're making on environment, social, and governance, or ESG. We recently launched a partnership with Calera, one of the world's leading hydroponic indoor vertical farming companies, to expand our portfolio of local farms that we source from to support our Serve Local program. Launched in 2018, the Serve Local program is designed to better connect U.S. foods customers with local farmers, producers, and manufacturers. Additionally, we remain committed to reducing the environmental footprint of our operations and recently announced a science-based climate goal to reduce absolute Scope 1 and 2 greenhouse gas emissions by 32.5% by 2032 from a 2019 base year. We are working to reduce emissions by optimizing routing to reduce miles driven, deploying new lower carbon footprint vehicle technologies, and investing in alternative fuels. Plans include converting our compressed gas natural gas vehicles, or CNG, to renewable natural gas and introducing 42 new CNG vehicles to our fleet by the end of 2022. In addition, our California Broadline Distribution Center fueling stations have been converted to providing renewable diesel fuel for our Vista, Corona, Livermore, and La Mirada diesel fleet, and our newly opened Sacramento facility leverages renewable diesel fuel at its on-site fueling station. We also plan to introduce 30 new electric trucks into our La Mirada, California fleet by 2023. In our facilities, we continue to optimize the efficiency of our building operations by investing in renewable energy and adopting energy-efficient equipment and technologies. Page 5 illustrates why we believe U.S. food is well positioned in the current environment. It starts with our diversified customer mix. Specifically, while restaurants represent over half of our sales mix, we are very focused on other customer types, such as healthcare and hospitality, to continue to propel our business forward. Healthcare and hospitality were about a third of our business prior to the pandemic, and we would expect them to return closer to that level as these two customer types fully recover. We are also driving market share gains in key customer types. Independent restaurants continue to perform well, and case volumes are well above 2019 levels. As you may recall, U.S. Foods is relentlessly focused on growing with the right customers, leading to ongoing optimization of our customer mix to ensure we are gaining market share profitably. And as a result, we continue to exit a small number of lower margin and or more complex primarily chain customers and typically replace that business with more profitable and more flexible IND, healthcare, or hospitality business, as well as chain business that is a better fit and less complex. We are continuing to improve margins of our existing chain business to reflect the current operating environment. In healthcare, we are pleased to report a positive trend in the case growth relative to 2019. This is a result of new business wins and improved bed occupancy rates in the senior living segment, as well as retail shops opening back up in hospital settings. In hospitality, we continue with significant year over year growth. Given the recent macro backdrop, we will be closely monitoring development in this customer type as the increased inflation levels and work-from-home trends impact customers' willingness to travel. As a pure-play, U.S.-only business, we are well-positioned to leverage our differentiated tools and capabilities to support the growth of our diverse customers. As I mentioned earlier, this differentiation has historically enabled us to win share in our key customer types, and we expect it will continue to enable us to do so. Customers are telling us that they appreciate our service and commitment to helping them grow and to fight through these difficult times. To them, US Foods does much more than just deliver groceries. Additionally, as a reminder, in rising inflationary periods such as these, US Foods is able to pass much of this inflation through via our contracts and pricing tools. Also, as the healthcare and hospitality customer types continue to return to 2019 or normal levels, we will benefit from these tailwinds by a top line growth and supply chain efficiencies. And lastly, it's important to note that U.S. Foods has a track record of resiliency during challenging economic times. For instance, during the recession of 2008-2009, U.S. Foods maintained essentially flat earnings and saw our case volume hold up reasonably well, declining only by mid single digits. With that, let's turn to page six to walk through how our strong performance in the quarter translates into progress on our long-range plan to drive profitable share gains, expand margins, and improve operational efficiencies. We are on track to meet or exceed our targeted growth rate of 1.5 times the market. We are continuing to win in the marketplace as demonstrated by our share gains and key customer types. As I noted earlier, the US Foods team-based selling approach continues to be a differentiator relative to our competition and is an important ingredient in our customers' success. The continued expansion of our cash and carry business, ChefStore, illustrates the power of our omnichannel strategy. During Q2, we opened a new store in Lynchburg, Virginia. We expect still to open four to six stores this year and are building our capabilities to accelerate that pace in future years. This strategy allows our broad-line customers to fill urgent needs between deliveries during the week to help meet demand It is also an excellent way for potential customers and consumers to get to know the outstanding lineup of U.S. Foods private label products and high-quality fresh offerings. Turning to the margin expansion or optimization pillar, we had strong gross profit results again this quarter. As we shared on our last call, we are seeing significant momentum with our inbound logistics program initiatives. This program continues to drive significant efficiencies and meaningful freight income expansion. Additionally, U.S. Foods continues to grow its exclusive brand penetration rate. For Q2, organic penetration grew by approximately 80 basis points versus the prior year. Our cost of goods program is also performing well and ahead of schedule with approximately 25% of our total vendor spend already under consideration. Turning to operational efficiencies, we are making solid progress in the midst of a very challenging macro environment. First, as a result of our continued focus on routing optimization and network planning, Cases per mile across our network are modestly above 2019 levels, despite case volume being down mid-single digits compared to 2019. While that is a significant achievement, we still have significant opportunity ahead. As I mentioned earlier, U.S. Foods is on track with our warehouse selection technology rollout, which is expected to be completed later this quarter. I'm excited about this rollout as it will continue to support our warehouse team members and enhance the selection process leading to better productivity and job satisfaction. Similarly, our outbound service levels to customers continue to deliver month-to-month improvement, which is a testament to the hard work of our associates, giving the fender fill rates remain challenged. It's important to note that the warehouse labour environment remains a challenge for us and our industry. However, we are confident that we have the right plans in place to address turnover and associated productivity headwinds. On page seven, you will see a summary of our strategic imperatives as we enter the second half of 2022. We are encouraged by our LRP momentum and will continue to update you on the performance of our three pillars of profitably growing market share, optimizing gross profit, and improving operational efficiency. We are and remain relentlessly focused on building upon our first class customer service program and platform. We will continue to make investments in our business to provide an enhanced and differentiated service platform at US Foods. And finally, as we create value for our shareholders, we will remain prudent around our capital allocation priorities. Our focus continues to be investing in the business, reducing our leverage, returning cash to shareholders, and pursuing tuck-in M&A opportunities. We will continue to execute against these priorities and focus on driving long-term growth ahead and thus expect to create significant shareholder value. We've made strong progress against our plan to date and expect to continue building on this momentum. And with that, I'll pass it over to Dirk to review the financial performance.