US Foods Holding Corp.

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the US Foods third quarter 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star 1. Thank you. Adam Dabrowski, Investor Relations. You may begin your conference.

Thank you, Rob. Good morning, everyone, and welcome to U.S. Foods' third 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 Dikowski, our Executive Chair, will join for our Q&A session. We'll 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 in 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 third 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 US Foods and I'll now turn over the call to Andrew.

Thanks Adam. Good morning everyone and thanks for joining us today. First and foremost, I'm delighted to report that we delivered strong third quarter results reflecting continued execution of our long range plan. US Foods performance to date underscores our confidence in achieving our 2022 outlook. We remain committed to continuing the momentum from the first three quarters and driving our long range plan. Let's turn to page three for key takeaways from the quarter. First, our results this quarter demonstrate continued solid execution across the three pillars of our long-range plan. Our associates are a critical part of this progress, and I am grateful to them for their focus on execution and on serving our customers. In addition to strong day-to-day execution, U.S. Foods associates have continued their tradition of stepping up when our customers and communities need us most. Most recently, during Hurricane Ian, which severely impacted many of our customers on the East Coast, our teams worked tirelessly to ensure our customers and the relief agencies we support could operate effectively and properly serve their customers. Based on feedback we received, our storm preparation and response are best in class in our industry. This intense focus on delivering for our customers is a large part of why we've been able to capture market share with key customer types in all three quarters of 2022. Second, with strong momentum in our plan, US Foods is increasingly well positioned to win in an evolving macro environment, particularly in light of our effective management of inflation and deflation, our scale and customer diversity, and continued recovery tailwinds. Our results reinforce our confidence to deliver a strong finish to the year. Finally, we expect to drive meaningful value creation for shareholders through a new share repurchase program announced this morning. We are committed to utilizing U.S. Foods' strong cash flow to deliver long-term shareholder value. Turning to page four, I'll start by walking through our third quarter highlights. Starting off, we once again delivered strong financial results. Net sales for the quarter grew 13% year over year. Volume growth strengthened as the quarter progressed, which we see as positive for both our business and for our customers. Adjusted EBITDA grew nearly 21% for the quarter, an acceleration from our Q2 growth rate. Our adjusted EBITDA margins also increased 20 basis points from the prior year as we gained operating leverage. Finally, we have updated our 2022 guidance towards the top end of our prior adjusted EBITDA outlook range. Our results show the resiliency in our business and the ability of our team to deliver on the plan we put forth earlier this year. Turning to our customer experience, we launched Moxi, our next-generation industry-leading digital tool, and we continue to drive market share gains with key customer types, which we expect to continue as we further embed share data into our operating processes. Finally, we further expanded our omni-channel with two new chef stores which opened in Q3 and early Q4. This brings us to four stores open to date with an expectation of two more openings before the end of 2022. We also continue to expand our Pronto service, a delivery service focused on smaller customers in concentrated geographies and are active with that program in nearly 30 markets. Next, we are pleased with our continued progress on supply chain. We completed our warehouse selection technology deployment as planned This system enables a better associate experience, improved selection accuracy, and ultimately a better customer experience. I talked last quarter about the various actions we are taking to improve employee retention, and I'm happy to report that we are seeing progress. Both driver and warehouse turnover have improved from what we experienced in H1. We are not yet where we want to be, and we remain laser focused on improving retention by simplifying our core processes strengthening leadership engagement, and offering greater flexibility with respect to shift schedules. Early returns from our seven-day workweek pilot in the southeast have been promising, and the flexibility it offers proved very helpful before and after Hurricane Ian. Finally, we continue to make progress on inbound logistics, resulting in further improved financial results and third-party partner collaboration. This work is well ahead of plan for the year. Lastly, we've been intentional in managing our capital structure and have reduced our leverage to 3.7 times as of the end of Q3 2022. During Q3, we prepaid $100 million on our 2021 term loan. In October, prepaid another $100 million on our 2019 term loan. We were also very pleased to have announced earlier today that our Board of Directors has approved a $500 million share repurchase program a significant step in further demonstrating the strength of our capital structure, confidence in our future, and focus on shareholder value creation. We see this move as highly accretive to shareholder value at our current share price and as further evidence of our commitment to being responsible stewards of shareholder capital. With that, let's turn to page 5 and discuss how our performance in the quarter translates into progress on the three pillars of the long-range plan to drive profitable share gains, expand margins, and improve operational efficiencies. Looking at our first pillar, we are tracking to exceed our targeted restaurant growth rate of 1.5 times the market. We are also continuing to win in the marketplace as demonstrated by our share gains in key customer types of independence, healthcare, and hospitality. The Moxie launch I mentioned earlier is a significant milestone Moxi is a step change to the customer experience from a performance and ease of use perspective. We have been focused on ensuring increased customer speed, confidence, and control. Our new one-stop shop app is 30% faster than it was before and is similar to the user experience of leading retail apps. Customer and seller feedback has been very positive, and we expect this to extend our technology lead in the industry. As mentioned earlier, we expect to open six new chef stores in 2022, which is the high end of the range we previously communicated. As we open stores, we are building our capabilities to accelerate that pace in 2023. Let's move on to the margin optimization pillar. As a reminder, we've been working on a number of internal initiatives to improve gross profit per case that are independent of market conditions. For example, we continue to build on the momentum from inbound logistics as our process management initiatives program continues to drive efficiencies. We effectively managed inflation and deflation by running our proven plays. In the third quarter, we saw less sequential inflation than we experienced in the first half of the year, and yet our gross margins remained strong and in line with the first half of the year. Our cost of goods management program is also performing well and continues ahead of schedule with approximately 40% of our total vendor spend expected to be addressed by year end. Turning last to operational efficiencies, we are making progress despite the challenging macro environment. Our routing optimization and network planning work continued and our cases per mile improved further ahead of 2019 in the third quarter to the best results we've seen to date. We are pleased with the progress, yet remain focused on the benefits still to come from this work and from the routing system replacement in a future phase. The work we are doing on employee engagement, flexible schedules, and process standardization, for example, is yielding benefits, as we experienced a lower turnover in the third quarter than we saw in the second quarter. We tackled productivity through a combination of network-wide initiatives and targeted optimization efforts in select markets. with the greatest productivity opportunities. Turning next to page six, we've made significant progress over the last three quarters and expect to build on that progress to achieve our plan. The entire U.S. Foods organization is focused on these initiatives and the actions that drive our long-range plan, and we are relentlessly executing against all three pillars. As a result, we are enhancing the customer experience and our operational foundation leading to share gains and significant year-over-year profitability improvements. We are a resilient business serving many customer types. Given our U.S. focus, our operations are less volatile than others. This positions us well to win, even in a challenging macro environment, and further strengthens our belief in the rightness and the achievability of our long-range plan. As we continue to build momentum against this plan, we will prudently allocate the strong and growing cash flow against our four priorities to create shareholder value. In summary, I am proud of and energized by our progress this year, and I am confident we will build on this momentum to deliver a strong 2022 and set us up for a strong 2023. With that, I will hand it over to Dirk to do a deeper dive into our financial results. Dirk, over to you.

Thanks, Andrew, and good morning. I will start on page eight. We're very pleased with what we accomplished this quarter. We continued to build on our momentum from the last two quarters and demonstrated progress against our long-range plan. Adjusted EBITDA grew 21% from the prior year to $351 million for the quarter, which is an acceleration from our Q2 growth rate. In addition to strong EBITDA dollars, our adjusted EBITDA per case remained strong and was in line with Q3 2019. Q3 adjusted EBITDA was the best quarter relative to 2019 since prior to the start of the pandemic. Adjusted diluted EPS increased 25% over the prior year of third quarter to 60 cents. These highlights demonstrate the actions we are taking to grow and further strengthen our business are delivering meaningful results. Net sales were $8.9 billion in Q3, an increase of 13% over the prior year. Total case volume increased 1% from the prior year, and food cost inflation was 12%. Similar to last quarter, our Q3 year-over-year case growth was negatively impacted approximately 200 basis points by the planned mid-2021 exit of the grocery retail business we temporarily added during the pandemic and a small number of strategic exits. Independent case growth increased 3% over the prior year. We continued our trend of strong gross profit dollar growth again this quarter. Our adjusted gross profit dollars increased 15% from the prior year, and as a result, we generated strong adjusted gross profit per case. This is important because we experienced little sequential inflation compared to large amounts in the first half of the year, yet we're able to maintain similar gross profit per case. OPEX remains elevated. However, as the quarter progressed, we saw positive signs with improved operations turnover and productivity rates. Let's look at volume further on page nine. Independent cases increased 3% on top of nearly 25% growth in the prior year. Hospitality grew 20% and healthcare grew 3%, offset by approximately 7% lower chain volume and the retail exit impact I noted previously. Our chain decline was driven this quarter largely by the strategic exit of a small number of lower profitability and more complex customers, consistent with what we talked about in Q2. Case growth across almost all customer types finished the quarter with stronger growth rates than they started and above the quarter's overall case growth for each type. This was very positive and we expect volume to improve further in Q4. We delivered share gains in key customer types again this quarter. I will focus briefly on growth relative to 2019, the last full year prior to the onset of the pandemic. Q3 total case growth was about 6.5% below 2019 with IND cases or independent cases performing the strongest at 3.3% above Q3 2019. We ended the quarter with strong momentum as our exit rates were above Q3 growth rates for most customer types. We still have embedded COVID recovery gains regardless of the macro backdrop. As healthcare cases were about 6% below Q3 2019 and hospitality was approximately 14% below 2019, both showing improvement from Q2 results. We are optimistic about our positive volume trends in September and October as they show continued strength and improvement. Turning to page 10, we are updating our fiscal 2022 guidance provided previously. We expect to exceed our volume goal relative to the market. Technology's latest outlook for 2022 calls for restaurants to be negative compared to 2021, while we expect to be positive, even with a small number of strategic chain exits previously discussed. Within restaurants overall, our independent growth remains positive and is expected to improve further. while the Technomic Outlook for the year is negative. We also are on track to exceed their outlook for healthcare and be in line for hospitality. As full-service lodging, an area that has been lagging in recovery, accelerates, we expect to further improve hospitality relative to the industry. Moving to earnings, we are tightening our adjusted EBITDA guidance to a range of $1.28 billion to $1.3 billion. This reflects our significantly increased confidence in achieving the high end of our previously provided range, as a result of three-quarters of strong execution against the three pillars of our long-range plan. We're also tightening our adjusted diluted EPS range to $2.10 to $2.20 to align with the updated adjusted EBITDA range. Interest expense is expected to be $250 to $255 million, and cash capex is expected to be $270 to $280 million. Total capex, including cash and financing leases for fleet, are expected to be approximately $400 million. Finally, we continue to expect net leverage to be approximately 3.5 times at year end. Looking at page 11, we made further progress again this quarter in strengthening our capital structure and reducing leverage. We reduced our net leverage compared to both Q3 2021 and Q2 2022. Our net leverage ratio was 3.7 times at the end of the third quarter, which is a 1.1-turn reduction from a year ago and a half-turn reduction from Q2 of this year. We reduced gross debt approximately $450 million compared to Q3 2021, and during Q3 2022, prepaid $100 million of term loan. And finally, to date in Q4, we have prepaid an additional $100 million of term loan. Leverage reduction is one of the focus areas of our capital allocation strategy. We continue to make strong progress toward our goal of 2.5 to 3 times net leverage. We expect to achieve net leverage range in fiscal 2023. I am quite pleased with the progress we continue to make in further strengthening our capital structure and delivering on our priority to reduce leverage. Turning to page 12, U.S. Foods has strong cash flow we're using to fuel our stated priorities. We will continue to invest in the business for growth with roughly $400 million in capital invested in 2022 against technology such as Moxie and warehouse selection, facilities such as our new distribution center in New Orleans, and our most environmentally sustainable distribution center in Sacramento, new chef stores, and fleet. We have made significant progress in reducing our leverage and expect to achieve our target range of 2.5 to 3 times in 2023. We are doing this by using our strong cash flow to reduce debt and growing earnings. Finally, we are very pleased to announce a $500 million share repurchase program. This is a significant step as we have demonstrated meaningful leverage reduction and focus on a balance of further leverage reduction and return of capital to shareholders. We expect to begin some opportunistic repurchases in the fourth quarter. It reflects strength in our balance sheet the resiliency of our business, our strong cash flow generation, and the tremendous value we see in our shares. In 2023, we expect to continue reducing leverage and opportunistically repurchasing shares in parallel. These actions and outcomes demonstrate our commitment to a strong capital structure and activities that create shareholder value. We expect to end the year in our target leverage range, inclusive of any capital we may return to shareholders. To sum it up, I am pleased with our progress this year and am confident in our ability to deliver our 2022 outlook. With that, I'll pass it back to Andrew.

Thanks, Dirk. In closing, we continue to be laser-focused on driving profitable share gains, expanding gross margins, and building on our strong operational and financial momentum. I am confident in the growing strength of our business thanks to the initiatives we have underway and the hard work of our talented team as they continue to focus on serving our customers and executing our long-range plan with excellence. To put it succinctly, we are winning, and I am proud of our progress. With that, operator, please open up the line for questions.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Jake Bartlett from Truist Securities. Your line is open.

Great. Thanks for taking the question. My first is on independent case growth, and it's nice to see an acceleration there. I'm wondering if you could provide detail on what's driving the acceleration, how traffic is going for the customers, whether that's been a you know, drag or a plus and whether the acceleration is driven by, you know, more by wallet share gains or new count generation.

Then I have a follow up. Hi, Jake. It's Andrew. Thanks for the question. Yeah, we're actually quite pleased with the balance that we're seeing in that growth. It is actually a combination of both share of wallet gains as well as new business. And I will also say we've also seen a reasonable strengthening of our own customer demand, suggesting that they too are growing as well. So it's sort of a combination across all three of expanding share wallet, driving growth through new customers, as well as our customers themselves seeing growth in their business.

Great. And then I have a question on Versus 19, the case growth Versus 19. It looks like In most segments, other than the hospitality and healthcare, there was a slight deceleration in the third quarter versus the second. So I just was hoping you could comment on what drove that, whether your shared gains were similar in the third quarter versus the second, and just any commentary on why those decelerated slightly.

Sure. Good morning, Jake. This is Dirk. Good question. So overall, I think we're pleased. What we saw was the beginning of the third quarter had a little bit of, just like you saw sort of broadly across there, had a slower start, just with some little bit slower demand broadly. We've seen that continue to improve as the quarter has gone on. Hence what Andrew and I have talked about, just the confidence in which we exited the quarter and entered the fourth quarter. I feel good about the trajectory of the case growth. I think the important thing is we do continue to see share gains across our key customer types. And we think just with healthcare and hospitality also, those are continuing to improve relative to 2019 and expect that to continue as well and is really a built-in tailwind. So Phil, the position is well, we are well positioned to grow with the right key customer types as we've talked a lot about. For us, it's about profitably growing with the right customer types as opposed to growth just for the sake of growth. So I feel good about the quarter and where we entered the fourth quarter.

Yeah, and Jake, just to add to your question, we saw share gains that were quite consistent in trajectory to what we saw in Q2.

Great. I appreciate it. Thank you.

Your next question comes from a line of Nicole Miller from Piper Sandler. Your line is open.

Thank you so much. A couple of quick ones. Can you talk a little bit about your fill rates, both inbound and outbound, and then any backhaul opportunity? I do believe it's a fairly material opportunity for you.

Yeah, thanks, Nicole. It's Andrew. Appreciate the question. So we would say our outbound fill rates are fill rates where customers continue to improve. The inbound, though, has been fairly flat versus where it was in Q2. A little bit of improvement in some key categories, but generally speaking, still fairly flat. We continue to basically manage that through two main means. One is to diversify our supplier base to make sure we've got alternatives. when our primaries aren't in stock, and secondly, to build up a little bit of extra safety stock to ensure that we have products in key categories. As far as the backhaul opportunity, that is something that we have been actively pursuing for quite some time, and you've seen from our freight results or logistics income results that those efforts are really paying off. I think we've still got some opportunity to continue to go after that, and that's something that that team is very focused on.

And remind us the inbound, like I've asked this question, I guess, of late, had the opportunity to, it's, you know, trying to understand the domino effect there. Is that something, you know, on the manufacturer side with their own labor, their own inventory, their own capacity, like what is, what is the, what's the problem today?

I think it's all of the above continued challenges. The only thing I'd add to that list is continued challenges, raw material supply in, in some, in some of our categories. The system is still, got some challenges that it's working through. We're definitely starting to see some improvements. And even though our fill rates in absolute terms haven't improved as much as we would like, our de facto fill rates have improved because of the diversification of supplier base. So we are still getting the product, which is not getting it from the usual sources in all cases.

And then thinking back to prior recessions or really any period of macro consumer weakness that you could speak to, you know, did U.S. Foods I guess sales, right? I guess it would be organic, go up or down. And more importantly, in terms of your share, when you think back to those types of prior periods, did you take share from bigger and smaller peers or did you seed share to smaller or bigger peers?

Good morning, Nicole. This is Dirk. That's a good question. So overall, Our industry and our business has shown itself to be quite resilient. If you look at what was a very tough recession in 2008, 2009, cases were down mid-single digits. Earnings were relatively flat. If you look at other, though, outside of 2008, 2009, the last three or four inflation-induced recessions, you saw much less volume decline. So it's a very, very small impact. I think that's a demonstration of the resiliency of our business. One of the things that... I think if you look back even in 809 and prior, we were a very different company. A lot of the work around differentiation that we've done has been since then. And so we would expect that all the same things that are resonating today for us to take share across these key customer types to continue to resonate. And in fact, I think that positions us even better to weather any kind of challenge that comes than we were in the past. So I think we're well positioned. And even though we can't control the macro, we can't control the execution of our long-range plan and the initiatives that drive that, and that's what we're going to focus on.

And last question, please. How does less inflation, disinflation impact the top and bottom line? And what is the lag until you see that impact versus the market movement in the underlying commodity items? Thank you.

Sure. So overall, what we see is the lag is relatively short. So, again, most of our contracts or non-contract price tends to be, you know, call it within a month. It can be from a week to a month or so. I think so pretty quick. The positive thing is in the third quarter, so we saw the least amount of sequential inflation that we've seen since I think it was the beginning of 2021 and very small amounts relative to the first half of the year. yet our gross profit per case remained quite strong. And I think that demonstrates the resiliency of the business. And within that sequential inflation, in Q3, we actually saw many center of the plates or protein categories that saw some deflation. And our processes that Andrew made reference to earlier in the playbooks that we have, we managed through that quite effectively. And those are the categories actually that we think are more likely to show the deflation. And almost all those categories tend to be a fixed markup over whatever our cost is. So therefore, over time, not really impacting our overall profitability. So quite pleased with the progress, quite pleased with our management through it and where we're positioned from an inflationary and deflationary environment.

Thank you very much.

And your next question comes from a line of John Hunbuckle from Guggenheim. Your line is open.

Yeah, I'm going to start independent cases, right? So I think you've said you've seen improvement thus far in the fourth quarter. Any quantification of that, right? I'd imagine it's fairly modest, but maybe that's wrong. And is that coming from a number of accounts or drop size? And then lastly, just on that topic, right? If the market grew slower, do you think you can flex up the 1.5 to maintain the current level of growth or

the market would impact your ability to grow.

So, John, thanks for the question. Yeah, we would say a meaningfully better exit rate than we saw overall in the quarter, and that would be driven by a combination of the factors you mentioned. As I said in the earlier question from Jake, we're pretty happy with the balance that we're seeing in the way we're driving IND growth.

I was just going to say, on the second part of the ability to outgrow, what we think is, in the environment, it's hard to know exactly where we shake out if you see a slowdown, but I think what we would expect is we would expect to outgrow, period. And I think that the thing that would be a factor that would potentially enable us to even outgrow further would be our differentiation and the offerings that we have to customers to help them succeed is something that it helps them through difficult environments. And we've seen that in the way we help customers manage their way through COVID with the PPP loans, how to get them, how to use them effectively, as well as how we're helping them manage through inflation in their businesses. So I think, if anything, we're probably better positioned. But the work that we're doing, we think, will allow us to continue to take share.

And John, just to add to that, I think one of the things we've learned most through COVID really is the ability to be nimble and agile and redeploy resources where the growth is. And I think that's been a pretty significant contributor to what has really been very steady, sequential market share gains period over period over the course of the entire first three quarters of the year.

And then maybe the second one, you know, Dirk usually give a little bit of an update, right, on staffing selectors and drivers, right? So where do we stand on that? And then I'm curious, on a go-forward normalized basis, right, do you think labor hours, you know, how much below case growth can labor hours be with the benefit of productivity, right? And I assume you, would you expect hourly wage rate, right, will that grow mid-single-digit? or there's an opportunity to bring that in lower than that.

Yeah, John, why don't I start, and then maybe Dirk can talk a little bit about what we're seeing on the rate side. As far as our staffing situation, we feel very good. We're in a very solid position in the vast majority of our markets. As I mentioned in my remarks, we saw turnover take a pretty meaningful reduction over the course of the third quarter, and that was a combination of primarily I think driven by some of the initiatives we've taken to better engage our workforce and create a culture that they want to be part of. Those are really starting to show some real impacts, but we've also undoubtedly had a little bit of help from the macro environment as well. So I would say right now feel pretty good about the staffing situation. I'll maybe start on the second part of the question. You know, what we've seen primarily as we get to a better place is obviously that has an almost immediate impact on our productivity and that is starting to show up in our business. The other thing we've also seen is there's a lot more straight time in our facilities, much less need for overtime, which is probably the first impact that we're likely going to see more than necessarily overall hours reduction in the short term.

John, I think to get back to the point on what we look at costs going forward. So I do think we can get back to an environment where costs grow in line to less than cases. I think that the part that's a little harder to know exactly is at what pace that happens, just knowing that so much of it is driven by the turnover and the retention factor. And as Andrew said, we're pleased with the early signs we're seeing there and We know we're not where we want to be, but we're going to continue to be focused on improving that. I think from an overall wage inflation perspective, as we see and as we look ahead, that does appear to be coming back, I'll call it, closer to historical levels of inflation. It's hard to know, depending on what happens with the macro, exactly where it settles. But I think the important takeaway there is it doesn't appear as though last year's level of outsized increases appear to be the new norm, but as you would expect, we're

watching and managing that quite closely okay thank you your next question comes from a line of edward kelly from wells fargo your line is open yeah hi good morning guys uh i just wanted to zero in on um you know a couple of things that have been sort of asked already but in terms of gross profit per case um i think dirk you pretty intentionally highlight the fact that inflation's decelerating yet cost per gross profit per case has been, you know, very strong. And even this quarter looks like it's accelerated. I guess what I'm trying to figure out, are you implying that, you know, the current level is sustainable? And then as we think about, you know, going forward into next year with the continued benefit of mix, is that a line item that you could even grow from here? I'm just kind of curious as to how you're thinking about gross profit per case off of this level.

Sure. I, Thanks, Ed. Good question. You're right, that was very intentional in highlighting that. And I think really what we're just trying to make sure is clear to people is the durability that we think is there in our gross profit per case. And in the environment where you see it in center of the plate deflation, which is where we think more of the potential of deflation is more likely than in grocery. And we're managing through it. So to your point, we do think as we look ahead, we think we can continue to have strong and growing gross profit. And that really is underscored by the points that both Andrew and I made of the majority, vast majority of our gross profit gains are coming from the things we're doing in our four walls as part of our plan, as opposed to deflation or inflation and the pieces of inflation that are help, especially on the parts of the business that are percentage markup we think are sticky. So overall, I feel like we're very well positioned, very happy with the progress we made this quarter, and look forward to continuing that into 2023. In fact, it's a good example as we think of 2022 and even when we look ahead to 2023, so much of the work that we've done on our initiatives this year across the spectrum of the pillars, we think positioned us very well and will drive a lot of the earnings growth as we get into 2023.

Right, and then just a quick follow-up on where you stand in terms of customer exits. I know you noted sort of retail and then some other miscellaneous exits, but are you now at the point where you're really focused on more of sort of like the net case growth going forward, meaning a lot of the exits are behind you?

Sure, so I think that out of the 200 basis points, that we talked about this quarter, a little under half of it was the grocery piece retail that is fully lapped by the end of the third quarter. The other piece that's changed will continue through Q1. What I would say is our focus has been and continues to be around growing with the right customers. So it's about growing profitably as opposed to just case growth. I think when you look at any business, looking across and having sort of some level of hygiene and what's the right mix and replacing customers, the better customers, is part of what we and you would expect, I would think, others to do as we go through there. So overall, it is about growing the business, but it really is about growing the business with those more profitable customers. And hopefully what you see this quarter is with 21% EBITDA growth, that we are well positioned as we think to exit 2022 and enter 2023. Awesome. Thank you.

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

Thank you very much. I just want to start with the announcement of the share repurchase program, which I think is a first. Can you talk about how your capital allocation priorities change And just those priorities and where buybacks fit in relative to reducing debt. Thank you.

Sure. Good morning, Lauren. Good question. So this is exciting for us to be in a position to talk about this. And I think it's really been, Andrew used the word intentional. We've been very intentional in the way we manage our capital structure. And so really what this does is it fits right into one of the four priorities that we've talked a lot about. And what we've said regularly is we don't need to get all the way to the three times high end of the range in order to begin this. But what I will be clear about, though, is that we remain committed to reducing leverage to getting in that range. And we think that going forward, this sort of repurchase is an opportunistic way to, again, create shareholder value, especially with our shares at the levels they're at. But secondly, that we would expect in parallel to further reduce debt and will grow earnings as well as repurchase shares and think that we will expect to be in that range of two and a half to three times by the end of next year, inclusive of any capital that we return. So this really is about just because of the strengthening of the capital structure, the maturity as part of our whole priority and plan that we've been managing to It is just the next step in that journey and very pleased with our ability to announce that today.

Great, thanks. And just on the gross profit side, can you talk about what you're seeing with private label? And in more challenging environments, would you expect to see an increase in the level of penetration? And I guess just going forward, most meaningful initiatives or opportunities you see to get that level even higher?

Hi Lauren, it's Andrew. Thanks for the question. We absolutely have seen throughout a great opportunity to improve our penetration. One of the challenges of course has been supply. Most of our arrangements are with a limited number of suppliers from pre-COVID times and we've had to significantly change our thinking around that to have alternatives in place. I think we've done a really good job of doing that. We're in a very, very good spot now from a fairly stable supply foundation to really aggressively go after those increases. We've seen a natural improvement as customers tend to seek out the value that Control Brand represents, and we expect that to accelerate as we get into a much better supply situation. So, yes, definitely expect to see that penetration level go up over the next several quarters.

Great. And just the last one, on the growth profit per case, how much of your business is on a percentage markup versus a dollar markup to the extent you're willing to provide that?

Sure. As a straight percentage, it's about half of the business, and then the other half is a combination of either a fixed markup and or kind of more spot pricing on non-contract type of business.

Perfect. Thank you.

Thanks. Your next question comes from a line of Jeffrey Bernstein from Barclays. Your line is open.

Great. Thank you very much. A couple of questions. The first one just on the food service chain business. You mentioned a decline in that business relative to independent growth. I'm just trying to get a sense. You mentioned a big portion of that is intentional exits of certain business. But we've heard from others that maybe there's an actual slowdown in the actual chain business. So just trying to get a sense for between what you consciously exited versus what perhaps is the business slowing down and maybe the outlook you see for that going into 23?

Sure. If we compare the decline that we're seeing or still the amount below 2019 levels, almost all of that is the combination of these exits that we've talked about as well as the two concepts that we've talked about that have more meaningful reductions in same-store sales. absent those two things, our chain business is relatively in line with where it was 2019. I think to your point, Jeff, so we're watching it closely. You do see across the different chains, you see some that continue to perform very well. You see others that don't perform as well. We'll continue to watch to see if you see any kind of a sort of more discernible slowdown. But again, those are typically on the lower end of the margin spectrum. And And we think that even the chains that we have brought on board and growing are well positioned in the environment that we're in. So our key is going to continue to be with growing with those key customer types and then being very opportunistic in the all other.

Understood. And then you mentioned on the commodity inflation side, I think you were implying you'd expect continued easing, whether or not that means as a basket, you're comfortable that it would fall into the single digits as we close out 22. And Is there actual concern? You mentioned deflation a couple of times. I know you were mentioning it specific to Senator Plait, but is there a concern that the overall basket would turn to deflation, or perhaps that wouldn't be a concern at all? Any kind of sense for where you see that basket of inflation going in the short term and whether or not it would be concerning if it went to deflation?

Yeah, so obviously it's a little hard to predict, as we've all discovered over the last several quarters, what inflation is going to do. Where I think what Dirk is sort of signaling is we have seen a little bit of easing off in a couple of the commodity categories, and we feel very good about our ability to manage through that. Our expectation as we look forward, though, and I think we've said this in the past, is there could very well be and likely will be some easing off in commodity categories, but we don't expect to see the same level of easing in non-commodity categories. Typically, prices go one direction in that area, and we expect, therefore, there to be a fair amount of stickiness in the non-commodity categories from an inflation standpoint.

And lastly, just because we're now a month or so away from 2023, is it still reasonable to assume that the prior guidance is achievable? I mean, it seems like you're coming in in 22 at the upper end of ranges. I know you've talked about growing that one and a half times the market, but I think you had also thrown out there at least a billion and a half in EBITDA and margins getting back into that mid 4% range. Is that realistic for 2023 or has the more recent dynamic made those goals change either for better or for worse?

Sure. So I think, Jeff, we will update that when we release our Q4. But what I will tell you is just kind of reinforcing what Andrew and I both said is we're very pleased with where we're, so the progress we're at to date and that we expect to exit 22 with. So I think with that, we feel very good about where the business is. We feel very good about the progress against the plan. And we'll let you take with that what you may. And again, look forward to talking about it more in February.

Sounds pretty clear. Thank you very much.

Your next question comes from the line of Mark Cardin from UBS. Your line is open.

Good morning. Thanks so much for taking the questions. So to start on MOXIE, it sounds like you're hearing good feedback so far. Would you expect for this to be a reasonable tailwind where it's been deployed so far in 4Q, or is it still too early from a ramp perspective? And then more broadly, how should we think about the pacing of the broader rollout over the next few quarters?

Yeah, thanks, Mark. So we definitely are very pleased with the early returns from Moxie. Moxie has really primary benefit in the short term of being a further inducement to all of our customers to get on the e-commerce platform, which we've talked about in the past, creates all sorts of benefits. We've been told and and we would agree that this really is comparable to any of the sort of leading retail platforms out there in terms of ease of use and functionality. As far as sort of the tailwind and impact on independent case growth, we haven't specifically tried to isolate on that, but it's clear that the momentum we're seeing is likely driven at least in part by MOXIE. In terms of this rollout, it is basically now rolled out across our business for our local customers. We still have some work to do to make the platform available to the entirety of our national customer base as we've got some, you know, we need to make some adjustments to the platform in order for it to fit their order guide setup typically. But that is something that will be actively worked on and likely come and start to see in the first half of next year. So very, very pleased with what we've seen from a local standpoint. Haven't sort of isolated the specific impact of Moxie, but have very little doubt that we are seeing many of the benefits that we've seen historically of getting folks on that e-commerce platform being driven by increases as a result of using Moxie.

Okay, great. And then my second one is a follow-up to Lauren's question. After your recent debt paydowns, how did your exposure to fixed and floating rates shake out? And how are you thinking about the mix there going forward?

Sure. So we ended the quarter. So as of end of Q3, we were about 55% fixed. So the additional $100 million from variable would increase the percentage of variable. Sorry, fixed a little bit. I would expect that the additional debt that we will pay down going forward will be against variable rate debt, so that will continue to increase the fix over time. Great.

Thanks so much, and good luck.

All right. Thanks, Mark. Thanks, Mark.

Your next question comes from a line of Kelly Bunya from BMO Capital Markets. Your line is open.

Hi. Good morning. Thanks for taking our questions. Just a couple of follow-ups. here on inflation and the impact. I guess, one, do you anticipate that moderating inflationary environment may or may not impact the competitive environment? So, that's part one. And then, also, do you think there could be some stronger volume growth? Hard to tell with all the volatility how inflation has really impacted volume. I guess I'm just trying to ask the elasticity question. If we start to see inflation really start to moderate here, could you have some stronger volume growth as the offset to that?

Yeah, thanks, Kelly. It's Andrew. Appreciate the question. I think we would say as far as what we're seeing in the competitive environment today and have done through much of the last couple of years is there still continues to be, I would say, a fair degree of rationality from a pricing standpoint. We're obviously all looking for opportunities to reduce our cost of goods and allow us to price to a more competitive level and that's something that will, I think, continue to be a priority for everyone, but I don't anticipate necessarily a meaningful change in the dynamics that we're seeing in the competitive environment as a result of that. And as far as volume growth is concerned, we've been obviously paying very close attention not only to our relative price position to the extent we're able to determine it, but also share gains by category and paying very close attention to category softening. And where we have seen that softening, we've taken some steps to address our prices if we believe that's the issue. But I would say overall, we've not seen a great deal of impact, even though prices have continued to go up at quite a considerable rate. Not saying it couldn't someday happen, and certainly something we're going to continue to pay closer attention to. But we have been feeling very good about the way in which we've been managing the balance between margin and volume growth in the environment based on the fact that we've been able to grow our margin at a pretty good rate while at the same time growing market share at an equally good rate.

And your next question comes from the line of John Ivanko from JP Morgan. Your line is open.

Hi, thank you. I would just take a step back and this might be an obvious question. When you look at your most profitable market segments, I mean, obviously, you know, independent restaurants, but you know, perhaps we could put healthcare and hospitality in as well. But, you know, focus on independent restaurants. What are the key reasons in 2022 of why you might be losing some customers? What are the reasons you know, why you haven't been able to gain new customers. I wonder if that's, you know, kind of changing and, you know, if you're kind of identifying, you know, the factors, you know, to what, like what you could do, what you could improve, you know, to make your customer base stickier, you know, and to grow your customer base, you know, maybe that, you know, how that's evolving and, you know, gosh, we've talked about so many things, but you know, what you think the most important thing that us foods can do outside of just straight price, obviously, you know, to really drive retention if that's maybe changed relative to a couple of years ago in this obviously dynamic environment?

Yeah, John, thanks for the question. I think we would say we've been very pleased really with the way in which we've grown our business across all our key segments as reflected in our market share gains sequentially from really the beginning of the year through till today. And we expect to see that you know, continue. And I'd say there's a couple reasons for that. I think, you know, as the supply environment gets to a better place, it allows what we believe to be some of the important differentiators we have as a company to really sort of come to the fore, namely our team-based selling, the great innovative product platform, as well as the technology that we bring to our customers. And so I think a combination of those things, as well as Just some of the great work the team has done around just focusing on going after business in the areas where it's growing have been really made us the year of success it's been in terms of our ability to continue to grow share across those key profitable segments you mentioned.

Let me ask you this. I remember some years ago, in terms of overall route efficiencies, there were changes of the day or time of day that maybe customers were getting their orders. that the customer wasn't necessarily happy about, you know, that could have influenced, um, you know, the, you know, the deliveries. I mean, things like the minimum number of cases that a customer would have to order. I mean, were those, you know, types of changes that were made a few years ago, you know, maybe obstacles or, um, you know, was that not really a factor? I mean, just, you know, just trying to think about what, you know, how maybe the customer's demand for flexibility may have changed in your ability to serve that flexibility.

Yeah, look, that's the balance. And, you know, getting back to your earlier question as well, one of the things customers, you know, are quite prepared to pay for is strong service. But you'll find many customers typically want to have their product delivered within a pretty tight window, and that's something we obviously strive to do. But we can't be everywhere sort of at once. We have to build our routes in a way that is most logical to sort of minimize miles. What we have found that I think has really been a very effective approach has been to prioritize really our most profitable customers in building those routes, and that has allowed us not only to create some efficiencies, but also to ensure that those high-value customers get the service that they deserve. And that's something that I think we will continue to build upon as we move forward. But there's a lot of things, you know, we've also, you know, been exploring, as we mentioned earlier, a seven-day work week, you know, which has, we think, some really important benefits from a selector turnover standpoint. But we also think there's an opportunity by spreading some of the volume across the week of creating a much better service experience for our customers as well, which is why we're very optimistic about what that could bring.

And, John, just maybe a thing or two to add is, just real quick, is... I think specifically on the drop size, in fact, we've not seen an issue. In fact, that can almost be, in some cases, a worse customer experience because you have more small drops on trucks that cause competitors' trucks to be late. But one of the things that I think underscores sort of our focus on the customer here is, so the things that Andrew talked about on the core sort of broad line delivery customers, We also have our Pronto that Andrew talked about, which is our small truck service that's live in almost 30 markets. And that is in largely dense, more urban areas that allows for smaller customers and has very attractive economics on there. And it allows more flexibility, later cutoffs for those customers. that have less storage space, et cetera, and we think there's still a runway there. Our direct that we've talked about, which is a much broader assortment online that's more of a direct ship. And then finally, of course, the cash and carry, which we continue to add to, and that allows our existing customers to do fill-ins as well as other smaller customers to shop their way. So it really is about, we think, serving the right customers with the right options as opposed to having our broad line try to be all things to all people.

Excellent. Thank you.

Thanks. Thanks, John.

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

Hey, thanks. Good morning. Congrats on the progress. And, yeah, I was actually going to ask about that seven-day workweek pilot and what you were doing with the program and maybe what you were looking at in timing, but it covered a little bit of that. But if there's anything more there, otherwise I did just want to follow up on The working capital, I guess, you know, that positive shift we have here, is it fair to say, you know, we've kind of transitioned to this becoming more of a tailwind now? And I think you said at the end of 23, Dirk, getting to within the range of two and a half to three times or maybe two and a half times. If that was the target, just wanted to clarify those.

Sure. So, overall, I think there's really not much more to add. on the first part that Andrew mentioned. On the seven-day work week, it is a pilot. As he talked about, early positive returns, but early on. So we look forward to updating as that progresses, but really a good win for sort of the associate, the customer, and the company if it were able to move ahead successfully. I think overall, we look to next year. You're right, it's a working capital, a good positive, good shift. I think that as the recovery continues in certain customer types, I think it will be, I don't know that it's a tailwind, but it gets closer to being a more normalized working capital environment as we look ahead. And then I think finally, can you remind me of the last part of your question? The debt leverage target. So I wasn't specific. Two and a half to three times is the range, and we expect to be within that. If we have anything more specific to add, we will do that when we do our 2023 guidance in early next year. But Just reiterating, pleased and on track for our three and a half times that we talked about by the end of 2022. So really making sure that we're delivering against the commitments that we have put forth.

Great. Are there any calendar shift impacts or anything in fourth quarter to think about? I think there might have been last year.

There is a little bit. I'm trying to remember. I think it's the New Year's holiday shift. So if I remember right, potentially a modest negative to Q4, but again, fairly modest or quite modest.

Got it. All right. Thanks very much.

Your next question comes from a line of John Glass from Morgan Stanley. Your line is open.

Thanks very much. Dirk, just back on the balance sheet, and I appreciate all the conversation about buybacks and sort of balancing that now. You still have a large amount of variable rate debt. One, What do you intend to do about that? Is that something that you can action? And I guess maybe as an adjunct to that, if you were either to hedge or to go back to the market and fix the rate, what do you think the prevailing rates are to do so? Is that the prohibiting factor right now? Thanks.

Sure. So overall, we do expect to continue to reduce that variable rate. To your point, we do look at our capital structure in that mix. And when we have an update, we would definitely provide that. We don't think that the current market is an inhibitor to potentially being able to take some action on more likely a form of financial instrument than a new issuance, but to the extent that we have an update, we'll provide that. I think the important thing is even at the rates that they're at right now, our overall borrowing rates are still quite solid, and we will manage that and think we're relatively well positioned in the environment.

Thank you. And just on market share growth, your peers down in Houston talk about this holistically, right? They grow at 1.4 or whatever times the market, including all segments. Can you talk about maybe that in your business in that context, what you think you're growing at relative to the market? And I know you said you're going to exceed your 1.5 times target for restaurants. What is that right now? Where are you growing at?

So overall, we would expect to be largely in line with the market, with our goals for the overall business, which would be about one time or a little over one time. We do have the retail piece that we would pull out this year again. But other than that, we expect to be in line. I think the important thing, though, to take away and the reason that we separate it and don't talk about it maybe in the same way that they do is because not all growth is the same. So if you had outsized growth in chain or K-12 education, that is not our focus. And we really are targeted at really outgrowing in those key, more attractive customer types. And I think what you're seeing is you're seeing this show up in our larger increases in profitability overall. And so we'll continue to grow and grow smartly, and you should expect that of us.

Okay, thank you. Thanks.

And your final question comes from the line of Peter Saleh from BTIG. Your line is open.

Great. Thanks for taking the question. I just wanted to ask about seasonality. And we've heard from many restaurant operators the seasonality kind of returned this summer, you know, slower in the summer and kind of accelerated into the fall. Can you guys comment on, you know, the seasonality in your business, particularly in hospitality and if there's any in healthcare as well? Are you seeing that seasonality return? Also, just any comments on Omicron, which I think was maybe a little bit in the fourth quarter last year and a little bit in 1Q. Just any comments on that would be helpful.

Sure, Peter. Thank you. Good question. So maybe I'll start with the Roxy. And to your point, Omicron, limited impact in Q4, more so in Q1. As we think about the seasonality, I think in the summer, some of the slowing, it's also – You know, harder to tell exactly, but seasonality, because that slowing also happened about the same time as you had fuel prices really spike. And we see that oftentimes that is like they were very closely correlated as far as timing on that. The important part for our business is the increased exit rates that we talked about and the strength into the early part of Q4. I think beyond that, the seasonality that I would reference, not as much on health care On hospitality, you do have some of the holiday events, and that will be something we're watching closely as that and other larger group events come back. I think the other final thing in hospitality is as you have events around football and things in the fall, again, watching that closely there. Those would be the main things that I would think about there and that we'll continue to watch as the year goes on.

And I think, Peter, the other thing I'd add is just, you know, we continue to have, we think, some real untapped recovery in, you know, those two pretty important segments, healthcare and hospitality. And so there will, we think, continue to be some, you know, sort of baseline acceleration in those segments that will sort of defy the seasonality that typically is associated with them and that we expect to see probably over the course of the next year or so.

Thanks. And just my last question would be, I think you mentioned several times some deflation in center of the plate. Any way to quantify what you're seeing, and is there any evidence to suggest that that won't continue into 4Q and into 23?

We don't typically quantify at that level, but I would say we saw in some categories a pretty meaningful pullback. But those categories are, I think, returning to sort of more normal volatility, I would describe it, than necessarily systematically reverting back to a deflationary world. In fact, we've already started to see a number of the poultry categories start to creep back up again. There just continues to be such volatility in the market from a supply standpoint that that's, I think, driving as much of the unpredictability of it. I don't I don't think the team is foreseeing a continued downward trend, but instead more volatility than perhaps we've seen where the trajectory was typically mostly upwards.

Great. Thank you very much. And this concludes today's conference call.

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