US Foods Holding Corp.

everyone to the U.S. Foods Q1 2023 quarterly earnings 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 star one. Thank you. Adam Dabowski, Director of Investor Relations. you may begin your conference.

Thank you, operator. Good morning, everyone, and welcome to U.S. Foods' first quarter fiscal 2023 earnings call. Speaking on the call today, we have Dave Flitman, Chief Executive Officer, and Dirk Lacascio, Chief Financial Officer. We will take your questions after our prepared remarks conclude. Please provide your name, your firm, and limit yourself to one question. Are earnings released? 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, unless otherwise stated, we're comparing our first quarter results to the same period in fiscal year 2022. In addition to historical information, certain statements made during today's call are considered forward-looking statements. Please review the risk factors in our 2022 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'll now turn over the call to Dave.

Thanks, Adam. Good morning, everyone, and thank you for joining us today. I've been at US Foods now for about four months, and I continue to get more excited about our future each day. I'll start by sharing a few highlights from the quarter, followed by my vision for the evolution of our company, and then we will go deeper into our Q1 financial results. After a year of strong market share growth and margin expansion, I'm pleased to report that US Foods remains intensely focused on executing our long range plan, and it showed in our financial results again this quarter. We increased adjusted EBITDA by 40 percent, expanded adjusted EBITDA margin by 80 basis points, and drove case growth of 6 percent, including 8 percent independent case growth. We delivered these strong results by profitably growing share, further optimizing gross margins, and improving operational efficiencies. We made progress on key initiatives within our long-range plan while taking actions to execute more effectively on fewer but more impactful initiatives. Finally, we prudently allocated capital and continued to invest in the business as we further reduced debt and opportunistically repurchased shares. We have made significant progress against our long-range plan and have strong momentum, thus reaffirming our full-year 2023 guidance. My clear expectation is that we will maintain that momentum throughout 2023 and beyond. While we continue to produce strong quarterly results, we've also made meaningful strides to enhance our organizational structure, our strategy, and culture of our company. Over the last few months, I've continued to spend time on the road, meeting more of our associates and getting deeper into our operations. During my travels, I've also met with many customers, investors, and analysts to hear their feedback about U.S. Foods. As a result, I firmly believe that U.S. Foods' long-range plan and the areas within it are broadly the right areas of focus to ensure success. I also have seen, however, that improved and focused execution remains a key opportunity for us to accelerate financial and operational results and ultimately provide an even better customer experience. To enable and drive this improvement, I made two important changes to the executive leadership team in early April to better connect the field to our process excellence teams. First, Andrew Iacobucci has been promoted to senior executive vice president of field operations and chief commercial officer. While this realignment necessitated the exit of a senior executive team member, It underscores the confidence I have in Andrew's leadership. In Andrew's new role, he leads our field operations, merchandising, and commercial excellence teams to drive better connectivity of our go-to-market strategy with the P&L owners. The second change is that our four regional presidents, the P&L owners, are now part of my executive leadership team. They now participate directly in all executive team strategy and operating review discussions. This new structure eliminates any potential miscommunication between our field and functional leaders, increases our speed of decision making, and improves our execution through alignment on fewer initiatives that will drive greater business impact. In addition to our structural changes, we have taken steps to further strengthen our culture and provide excellent service to our customers while remaining intensely focused on profitably increasing market share and improving margins. This shows up in a simplified summary of our strategy on slide five. These adjustments are more an evolution than a revolution, but it is important to me that our strategy is simple and absolutely clear for all of our associates so we can be more action and outcome oriented across the company. I have also asked our leaders to assess how they are spending their time against these four pillars. Our great food made easy strategy defines what we collectively drive to win in the marketplace. As we've said before, we work to exceed expectations and give our customers the competitive edge they need. With our unrivaled portfolio of exclusive brands, our omni-channel offerings, and team-based selling approach, we are well positioned to meet our customers' unique needs. And we will lead with fresh and reliable as we see significant growth and wins coming from these areas. It's intentional that our first pillar is culture because our culture and our people fuel our strategy. This pillar includes safety, which is a key area of focus for us that I will speak about in a moment. Fostering an inclusive culture and being a responsible company are also drivers of business performance and important to our associates, communities, and the planet. We recently put these words into action at a meeting with our top leaders where we gave back to the community. Together, we assembled 1,000 gardening kits for underserved students in Chicago who live in food deserts where access to fresh produce is scarce. Our second pillar is service. Our research tells us that the most important services to customers are on-time, correct orders, and high-quality, fresh products. No single food distribution company is a clear leader in all of these areas, which means there is a great opportunity for us to win on service. Our service pillar focuses on reliability, being efficient across our operations from routing to logistics to replenishment, and providing the best experiences to customers through our technology and omni-channel offerings. Our third pillar is growth. we are focused on gaining profitable market share by targeting the right customers that want to win with us, capitalizing on what differentiates us, and driving fresh in produce and center of play. Last, but certainly not least, is profit. This strategic pillar highlights initiatives that will expand our margins, drive continuous improvement in productivity, and optimize how we spend our resources. Turning to slide six, I'll provide a little more detail on how we are evolving our culture as a company. When I joined U.S. Foods, I was struck by its tremendous culture. It's palpable everywhere I go. While this is a unique strength to DotaPond, we have evolved our cultural beliefs at U.S. Foods to reinforce the behaviors, including safety, continuous improvement, and productivity that will accelerate our ability to deliver on our long-range plan today and in the future. Our beliefs are important because they inform the actions we take, and our actions drive our results. Specifically, I have focused on three key areas where we can improve our business by building an even stronger culture of safety, execution, and urgency. In late April, I brought together our top 200 leaders to align them around a shared vision. We have underscored safety as the top priority and have implemented measures to increase focus on safe operations and hold every one of us accountable to work safely each day. The safety of our 29,000 associates is extremely important to me and is core to the success of any great distribution company. While we began to drive this stepped up focus on safety only a few months ago, we are starting to see early signs of significant improvement. Second, We have refocused our supply chain team on the basics of distribution excellence through standardization of best practices and leadership accountability for service and cost. Two examples of how we are putting this into action are standardized labor planning and market-led routing. Third, we are ingraining a renewed sense of urgency for delivering results throughout the organization. This includes being more decisive and moving more swiftly to put plans into action while still being thoughtful about implementing initiatives that will most effectively drive success. I expect each of these areas of focus to be key building blocks as we work together as one team at US Foods to improve our execution and increase our effectiveness to generate even stronger and more sustainable outcomes. Together with the executive leadership team, I will continue to review the business and the additional opportunities within it. We expect to pursue other actions as we complete this work through 2023 to achieve further progress against our current long-range plan and beyond. With that, let's turn to our recent business results. Turning to slide seven, I'll walk through some of our first quarter highlights. We delivered strong financial results again this quarter, continuing to build on the excellent results we delivered throughout fiscal 2022. Net sales for the first quarter grew 10% compared to the same period in 2022. Year-over-year total case volume growth was 6% and strengthened from Q4 to Q1 based on a combination of the Omicron comparison in January and year-over-year market share gains in target customer types. Case growth was led by 8% growth in independent restaurants, 6% growth in healthcare, and 19% growth in hospitality, while chain cases were down 1%. We grew adjusted EBITDA dollars 40% despite essentially zero sequential inflation in the first quarter of 2023. Our adjusted EBITDA margins also increased 80 basis points from the prior year as we gained further operating leverage in the quarter. We remain on track for the 2023 full year guidance we outlined in February, including adjusted EBITDA of $1.45 to $1.51 billion. Turning to our customer experience, we again gained year-over-year market share in target customer types via our customer focus and differentiation strategy. We are seeing continued increases in the adoption of MOXIE, our digital customer platform, among local customers and are on track to launch MOXIE for national customers later this year. Finally, PRONTO, our small truck delivery service focused on customers within targeted dense geographies. continues to grow organically in both existing and recently added markets. We have established a presence in 29 markets and expect to add five to seven additional markets throughout the remainder of 2023. We continue to make progress in our supply chain operations as well during the quarter. The positive turnover and productivity trends we drove in the third and fourth quarter of 2022 continued in the first quarter, with driver turnover further improving. Driver turnover and productivity is now essentially in line with pre-COVID levels, and our warehouse turnover maintained the improvement we experienced in the second half of last year. There is still more work to be done, but I am very encouraged by the progress and strong evidence we are seeing that the actions we are taking are yielding results. We are actively piloting our flexible employee scheduling and seven-day delivery in two additional markets. While it's too early to quantify results, qualitative feedback has been very positive. At the same time, we are planning to expand the flexible scheduling portion of this work to additional markets during the remainder of the year, which we expect to result in further improvement in employee retention and productivity. Lastly, on supply chain, we further improved our customer service levels in the quarter. Our service level to our customers is nearly where it was prior to COVID. While vendor service levels to U.S. foods are not yet back to pre-COVID levels, they continue to improve, which is very encouraging. Finally, we continue to improve our capital structure and we're diligent about prudently allocating capital this quarter. Through a combination of earnings growth and debt reduction, we meaningfully reduced our net leverage from year end to 3.2 times at the end of the first quarter. Each of the actions we've taken reinforces our commitment to being responsible stewards of shareholder value, which Dirk will talk about shortly. Now let's turn to slide eight, where you can see the progress we're making on our long-range plan. Starting with profitable market share growth, we drove strong Q1 volume growth, especially in our target customer types. We are on track to exceed our one and a half times goal for restaurant volume growth for the full year, led by strong independent case growth. We had year-over-year share gains in each of our target customer types and expect to build on that further throughout the year, including through a strong healthcare and hospitality new business pipeline. We improved our profitability as we continue to grow faster in the targeted, more profitable customer types of independent restaurants, healthcare, and hospitality. Moving to margin optimization. Our team effectively managed through a more volatile commodity pricing environment to maintain solid gross profit per case. This was accomplished through the established process we have to specifically focus on volatile commodity categories. We continue to make progress on our COGS improvement by working jointly with additional vendors and remain on track to address a total of 60% of COGS by the end of fiscal 2023. As vendor supply improves, we renewed our strong focus on growing private label penetration. This remains a significant opportunity and one where we bring added value to our customers through quality and innovative products at a better price. Lastly, we continue to advance our efforts to drive operational efficiencies. Our routing optimization work continues with further gains via reduced mileage, turnover while improving, as I discussed on the prior slide, remains a challenge and one we continue to focus on. Finally, we began work during the quarter to identify and action savings on indirect or non-COG spend, which is an exciting area of largely untapped opportunity. This work is just beginning, and I expect savings to begin to accrue later this year, ramping up more significantly throughout 2024. U.S. Foods is advancing the initiatives that drive our long-range plan. I am proud of and grateful for the great work of our associates who are key to achieving this important progress. With that, I'll hand it over to Dirk to go over our financial performance and guidance in further detail.

Thanks, Dave, and good morning, everyone. Let's turn to slide 10. We're very pleased with what we accomplished during the first quarter and the strong momentum we continue to have in our business. This clearly showed in the first quarter results. Net sales were $8.5 billion in Q1, an increase of 9.5% over the prior year. Total case volume increased nearly 6% from the prior year, and food cost inflation was approximately 3.5%. As Dave mentioned earlier, case growth was led by 8% growth in independence, 6% growth in healthcare, and 19% growth in hospitality, while chain cases were down 1%. In the first quarter, adjusted EBITDA grew $96 million, or 40%, from the prior year to $337 million. It was a very strong quarter, especially given the current year had essentially no sequential inflation, while the prior year had more significant sequential inflation. In addition to strong EBITDA dollars, Our adjusted EBITDA margin increased 80 basis points from the prior year, as our gross profit grew significantly more than OPEX. We continued our strong gross profit growth through the first quarter, which we are quite pleased with, as again this quarter there was essentially no sequential inflation. Our adjusted gross profit dollars increased 14% from the prior year. OPEX remained elevated. However, we saw continued improvement And thus in Q1, the year-over-year cost increase was much lower than it was all of 2022. The improved turnover and impacts from our other initiatives drove increased productivity and are showing up in our results. We will continue to take actions to build upon this progress and still see significant opportunity for improvement in our supply chain operations. We made further progress against all three areas of our plan in 2022 and to date in 2023, and we are excited about what we can achieve this year and beyond. Moving to slide 11, we further strengthened our capital structure and reduced leverage in the first quarter. We meaningfully reduced our net leverage compared to both the first and fourth quarter 2022 through a combination of net debt reduction and earnings growth. Our net leverage ratio was 3.2 times at the end of the first quarter, which was a 1.1 turn reduction from a year ago and a 0.3 turn reduction from the end of 2022. We remain committed to reducing our leverage and remain on track to reduce net leverage to below three times by the end of this year. We also repurchased $34 million of shares during the first quarter, bringing us to $48 million to date against our $500 million share repurchase program. We remain focused on creating value for shareholders and allocating our capital prudently by continuing to invest in the business, reducing leverage to our target range, returning capital to shareholders through our share repurchase program, and opportunistically pursuing accretive tuck-in acquisitions. We are reiterating the fiscal 2023 guidance that we released in February of 2023 and are pleased with the progress to date. We will continue to focus on controlling the controllables to ensure we are well positioned to deliver against this guidance. I will wrap up my comments today with a few thoughts on slide 12. We are generating momentum in our business and executing all three areas of our long-range plan. We are driving share gains and improved customer mix as we remain focused on the customer experience and further improving our operations to increase service levels, and drive efficiencies. None of us know exactly what lies ahead in the macro environment. However, US Foods is well positioned to win as a US-focused business with a resilient demand base across a diverse set of customers and with a focus on helping our customers make it. Finally, we will continue to be prudent with capital through a balanced deployment approach and are very focused on delivering compounded shareholder value. With that, I'll pass it back to Dave for his closing remarks.

Thanks, Dirk. I will close where I started. Four months into my role, I am more excited about U.S. Foods and our future than I was the day I joined. During one of my recent site visits, I met Christopher Moore, our night warehouse manager in Austin. In just five months with the company, Christopher quickly led his team to becoming one of our most productive night selection crews and has gained the trust of his associates. Struck by his leadership, I asked him about his background. I soon learned that, in addition to his 12 years of experience in food distribution, he had spent 23 years in the Army supply chain supporting Operation Iraqi Freedom and Korean Defense, where he received two Bronze Stars. Associates like Christopher are one of the many reasons I appreciate being part of U.S. Foods. As we head into Memorial Day later in the month, I want to thank Christopher, the 120 members of our Those Who Serve employee resource group, and all of our military service members across this great country. Additionally, as I have spent more time with our team, I have gained a better understanding of our momentum and areas of opportunity. While macroeconomic factors will inevitably impact results, I believe we are on track for 2024 adjusted EBITDA at or near $1.7 billion. We are focused on building upon the company's many strengths while finding ways to more effectively execute our strategy and accelerate our rate of improvement. I am highly confident this combination will lead to a very bright future for U.S. foods and all of our stakeholders. Finally, I would like to thank our 29,000 associates for their unwavering commitment and the work they do each day to serve our customers. It's clear that our strategy is working, and we are continuing to make progress against our long-range plan, which is in very large part due to the talented team we have here at U.S. Foods. With that, Cheryl, please open up the line for questions.

Thank you. To ask a question, please press star 1. Your first question is from Kelly Bania of BMO Capital Markets. Please go ahead. Your line is open.

Hi. Good morning. Congrats on a nice quarter here. I just wanted to ask about, I guess, seasonality. So Q1 is your seasonally weak quarter, and if you look at where this quarter came in from an EBITDA margin perspective, it would seem that you're set up for a pretty strong year here. So maybe can you just help talk about why Q1 might be up 80 basis points, but the rest of the year's planned much more conservatively? Any special factors that impacted this quarter versus maybe some conservatism in the outlook.

Sure. Good morning, Kelly. This is Dirk. I'll take that one. And as you heard both Dave and myself say, we're very pleased with Q1. And I think what hopefully everyone sees in the quarter is just all the things we've talked about, our initiatives and the strength that we've worked hard over the last year to build really show up in those strong results. And we do think that sets us up for a very good year and are pleased with the results to date. I think overall what you see is, you're right, Q1 is typically a softer margin. We're happy with the improvement. We do expect to continue year-over-year improvements, you know, TBD and the specific amounts over the course of the year. But I think we are well set up with all the work we have done. And I think, you know, to your point on the outlook, it's one quarter into the year. And while we're pleased, we'll update guidance as we see appropriate as we get further into the year. but happy with where the business stands and our outlook for the business.

That's very helpful. Dirk, maybe can you just unpack the gross margin a little bit more for us? It seems like you were happy with that in light of no sequential inflation here, but maybe can you help us unpack the impact of just mix on the gross margin, customer mix in particular versus some of the internal initiatives?

Sure. Mix is definitely a help, but the lion's share of the improvement is all of the work that we've done over the course of the last year. So mix, as we've talked a lot about, that's why for us just any growth is not the same, and really growing with our target customer types and being thoughtful on other customers that we grow with is so important because mix is a help. But the lion's share is definitely from all the initiatives we've talked about from cost of goods, pricing optimization, logistics, et cetera.

Great. Thank you.

Kelly.

Your next question is from Alex Slagle of Jefferies. Please go ahead. Your line is open.

Thank you. Good morning. Congrats to the team and Andrew on the promotion. I had a question on customer mix. You provided an update on that mix in the slides, and you can kind of see the profile gradually moving back towards where it was pre-pandemic, but still a good 500 basis points or so off. Do you think it eventually gets back to that profile, or has the growth during the pandemic or priorities altered that? If you were to get back to the previous customer mix, how would that alter your margin and growth profile?

Good morning, Dirk. I'll start with this one. So, yes, as you pointed out, we saw very strong growth in those other customer types of healthcare and hospitality as That is a healthy tailwind that we have that we talked a lot about in the last few quarters. And you saw show up again this quarter as part of our strong case growth, especially with those target customer types. And as you noted, as those continue to recover, those will continue to become a larger portion. I think as our view isn't changed, we largely expect them to get back to where they were prior to that, to the combination of the recovery and our new business. And we think just through the continued strong growth that we've demonstrated with independence and the continued new business and then recovery and healthcare and hospitality, that mix will continue to be a creative to our business and really add to our balanced approach to profitably growing volume and margin expansion.

Great. Thank you.

Your next question is from Lauren Silberman of Credit Suisse. Please go ahead. Your line is open.

Lauren Silberman Thank you and congrats on the quarter. Dave, I wanted to ask about the 2024 guide at or near $1.7 billion. How much of the guide is contingent on the underlying consumer macro environment? And should we see a more challenging environment? How might your strategy change?

Yeah, well, great question. I would just say that as I've leaned in more and understood not only just what the basis was for 2024, but importantly, the underlying momentum in the business, that's where you heard my comment. While we can't control the macro, as you just heard Dirk say, we believe our destiny is completely within our control. We've got great focus on the right target customers. Obviously, the industry is resilient through ups and downs of economic cycles. But importantly, the diversity of our strategy and our business mix, I believe, sets us up to win. And you've heard me talk about the excitement in things like the productivity initiatives, the profitability work we have going on inside the company. We've got a long trajectory here of top and bottom line growth. I'm very excited about the momentum, and that's why you heard me reaffirm the 2024 number.

Great, thanks so much. And then is there any additional color that you can provide on the cadence of case growth throughout the quarter and to the extent you're willing to quarter to date just given what we've been hearing in terms of an underlying slowdown?

Yeah, let me just take the second part of your question here and let Dirk comment. You know, like you've heard from others, we saw, you know, obviously the Omicron lapping in January, a little bit of weakness that started towards the end of February. started to bounce back in late March, and we've seen thus far early in the second quarter is recovery and stabilization. And so we're excited about the momentum. We think we have the right focus, and we're excited about the future.

I think the only thing I would add is we do expect sort of a normalized growth environment because of our strong performance and share gains across the three customer types and the recovery tailwinds that we've talked about in healthcare and hospitality. we are and expect to continue to see some healthy growth levels.

Great. Thanks so much.

Thank you.

Your next question is from Jeffrey Bernstein of Barclays. Please go ahead. Your line is open.

Great. Thank you very much. I had one question and then one follow-up. From an inflation standpoint, clearly everyone's talking about the moderation in cost of goods. For you guys, it went from north of 8% last quarter to sub-4% this quarter. I'm just wondering where you see that going over the next few quarters, whether you see potential for absolute deflation in coming quarters, and what the impact would be to your business if it stabilized here versus if it went to some level of deflation. How would that change the way you think about your business? And then I had one follow-up.

Good question. A lot of discussions around this in the industry, and obviously we've seen the inflation rate decelerate. But as we've said in our prepared remarks, we've had essentially no sequential inflation here for a couple of quarters. You've seen us, driven in large part by the initiatives we're driving, continue to expand our margins. So we have a great process around managing inflation and deflation in the company. I have absolutely no concerns about wherever that ends up going forward. And as we said last quarter, you know, lapping of what happens in 2022 was already built into our forecast.

Yeah, the only thing, Jeff, that I would add is that similar to last quarter is the places where we've seen deflation have been in the proteins and commodity as opposed to core grocery. And that's the place that we tend to be more fixed markup. And so therefore, overall, are still seeing, again, those strong gross profit rates that we've talked about and That is that the fact that groceries continue to hold in as we had talked about and expected, we still see as positive and our outlook there is not changed.

Understood. And then the follow-up is just on the market share gains, which David, I know you mentioned a couple of times. I'm wondering whether you'd be able to quantify that type of metric for the first quarter, where you think maybe it came from. And conceptually, do you think market share gains would accelerate if the economy were to slow? Do you think you're in a position where the bigger players would see even greater gains? Is that a potential offset to the slowing macro? Thank you.

Yeah, I'll answer the second part of your question first. Unequivocally, yes, as the economy slows, I think those of us with substantial scale will have the opportunity to continue to lean in and take profitable market share 100%. But as you know, in our target customer segments, we've been focused on taking profitable market share for a long time. And, in fact, this quarter represents the eighth consecutive quarter that we've taken share in the independent restaurant segment. So there's no reason that we would expect that to slow down. We're 100% focused on it. We understand that a very granular data, with very granular data, where our market share gains opportunities are, and our team is aligned around it. So I feel good about the momentum. The focus is right on, and more to come.

Thank you.

Thank you.

Your next question is from Mark Carden of UBS. Please go ahead. Your line is open.

Good morning. Thanks so much for taking the question. So first question's for Dave. Just digging a bit more into some of your commentary at the beginning of the call. Now that you've been at U.S. Foods for a few months and have had some more time to really dig below the surface, where do you now see the company's biggest current competitive advantages relative to the industry as a whole? Has it changed much since last quarter? Do you see opportunities to strengthen moats? And then... You talked about improved and focused execution being an opportunity. Curious as well if you've been surprised anywhere on some low-hanging fruit on the opportunity side that can really be addressed quite quickly.

Great questions. We have really strong competitive advantages, and I mentioned this on the last quarter call. Our team-based selling model is, I believe, a key differentiator for us. The way we pair up our TMs with our restaurant operation consultants, and very experienced chefs, many of which have come out of the industry and understand the back end operations of our customers. And actually many were operators, in fact, in restaurants. That's a real competitive advantage for us. The second one I would point to, and you heard me talk about this earlier as well, is our technology advantage. We are the market leader in technology. In fact, 84% of our transactions are transacted through e-commerce today. excited about the traction we're getting in Moxie. You need to think about Moxie as putting our entire supply chain in the hands of our operators and our customers. No other company has the capability that we have. Anything from ordering to understanding real-time visibility into our inventory, our customers being able to reserve that for their orders. We're second to none. It's great technology. We're rolling it out aggressively across the country. And I really believe that's a strong differentiator for us and one we will continue to invest in.

That's great. And then at this stage, how are you thinking about your chain business growth relative to your independent growth? Are you expecting to pursue any more strategic exits in chains at this point? Are you largely where you'd like to be? And then how are you thinking about the health of independence relative to chains if we do see a steeper economic downturn?

Yeah, I think we have the right focus on change. Don't anticipate any other strategic exits at this point. Obviously, the market's very dynamic. We'll make the right decisions for the business going forward. We're opportunistically leaning into change where it makes sense. Obviously, independence is a more profitable segment for not only us, but for the industry, and one where we have ample opportunity to gain share. You heard my excitement about eight quarters of share gain and independence. I do think You know, people are looking for an experience, so that's why they go to independent restaurants. The unique capability of these operators and local markets tailoring to that need. We have great offerings, particularly in our private label, our exclusive brands. Our penetration and independence, about 51%, and that's why you heard me say in my prepared remarks, there's more opportunity to penetrate the market with our exclusive brands. And as the manufacturer's supply chains have recovered, we expect that growth to continue to accelerate.

I think, Mark, the only thing I would add is I think that back to the independent health is there was a lot of speculation of independent weakness heading into COVID, and they were surprisingly resilient. Independent operators are very resilient. And that's also where a lot of the things that Dave talked about with our focus on helping our customers make it, and many of them have adapted over these last few years. And so I think they're probably stronger operators than they were even going into COVID.

Great. Thanks so much. Good luck, guys.

Thank you.

Your next question is from Edward Kelly of Wells Fargo. Please go ahead. Your line is open.

Hi, guys. Good morning. Congrats on an impressive start to the year, by the way. Dave, I wanted to ask you about the independent case growth number. I mean, certainly, you know, very impressive. I don't think we've seen a number this big out of U.S. foods since they've gone public except for the, you know, COVID recovery. Can you talk a bit more about your dig into the inflection here, you know, around this? And then I think taking a step back, you know, U.S. has been sort of a story of, you know, lower, but, you know, focus on profitable case growth. And obviously, you know, these numbers are pretty strong. How do you think about what the appropriate level of overall case growth is for this business going forward in terms of what you're targeting? How does that differ from what's been happening here previously?

Yeah, I think we can grow, and we can grow profitably and continue to take share in independence. And what I love about our focus, and I commented on this, I believe, in February, the granularity with which we understand our market share on a local basis is very solid in our sales teams. have rallied around that. They're competitive. They want to win. They understand where the growth opportunities are. We have great brands to take into these independent operators. And so that is at the heart of the momentum. And again, Q1 is just the culmination of the good work the company's been doing for a long time. You just heard me say eight consecutive quarters of independent market share gains. And so I think that's an opportunity for us to continue to stay focused on where we can win where we provide differentiated value for our customers. And so I do expect that will continue. Excited about it, the organization's focused on it, and there's no reason we can't continue to take market share.

Great. And then quick follow-up just on gross profit per case. I mean, Q1, traditionally low point for the year with progress from here. I mean, any reason to think that you cannot continue to grow gross profit per case from here despite, let's call it minimal to no inflation?

Good morning, Ed. This is Dirk. I'll take that one. Yes, pleased with the gross profit in Q1. I'm not going to comment on the specific quarters, but what I will come back to is the comment that we do expect gross profit this year to be above where it was last year, and we think that as we look ahead, we can continue to grow gross profit through the continued execution of our different initiatives. And that's, again, mostly within our control, and we are optimistic and positive about our ability to do that. In fact, I like you used the word inflection, and so we think that This quarter is an inflection point where now it's two quarters in a row with essentially no sequential inflation. We've had very strong gross profit. We've continued to not only grow dollars at a very healthy level, but continue to expand EBITDA margins. And that balance of profitable growth with those right customer types and margin expansion, we think it's a great recipe for a lot of success ahead.

And I would just add that the momentum that we have on improving our mix is strong. You've seen that in the results, and that will continue. But that aside, as Dirk has said, I just want to reinforce the point. The majority of our gross profit per case gains are from initiatives that we're driving. I continue to see a lot of low-hanging fruit in that area of the business, and we'll continue to stay focused on driving those outcomes in a way that makes sense for our customers and for our company. Thank you.

Your next question is from Jake Bartlett of Truist Securities. Please go ahead. Your line is open.

Great. Thanks for taking the question. Mine is on the competitive environment and the pricing environment. The largest distributors have been gaining, all of them seem to be gaining significant market share, and it suggests that the others, smaller distributors, are losing significant market share. So the question is, with supply chain constraints and staffing constraints easing, should we expect those smaller competitors to start trying to compete more aggressively on price? And this just kind of goes back to the question of sustainable gross profits per case. But I guess if you could just chat about, you know, what you think the dynamic is there and what the risk that pricing competition is going to increase significantly.

Yeah, the first thing I would say is that we always operate in a highly competitive market, right? And I don't really see the macro changing that, the big picture of that. Sure, as things ebb and flow, you may see segments of competitors get more aggressive. But I keep coming back to the things that we tell our team internally is let's stay focused on running our playbook. We have great products that differentiate us. We have tremendous scale. We can be competitive where we need to. And obviously, our customers demand that of us. As we're talking about pricing with our customers, they want to understand how we're getting more efficient as a company before we're talking to them about price. And you heard my excitement about the runway we have to control the things that we're driving from an initiative standpoint that will improve our profitability. So I don't want to discount it, but I just want to say that it's not a distraction, and I don't really see that impacting our results going forward.

Okay, great. And then I just want to make sure I understood the message on the guidance. In light of the strong first quarter results and kind of maintaining the annual guidance, my impression, you know, what I'm hearing is maybe some conservatism, but I want to make sure that that you don't also kind of see some incremental headwinds out there. We've heard from others about, you know, perception that the market's demand is slowing, you know, inflation is decreasing, which might be pressuring margins. But is your kind of maintaining the 23 guidance reflective of conservatism or some sort of incremental, you know, negative that you see cropping up?

Good morning, Jake. Dirk, I'll take that one. So yes, Q1 came in a little bit ahead of where we had expected. Very pleased with the start. And really the way I would read into it is it's one quarter into the year. And as appropriate, we'll update our guidance as the year goes on. Anything with inflation or otherwise, our outlook hasn't changed there. Any of that was contemplated in our outlook for the business. So I just land on one quarter in and very pleased with the performance to date and the outlook for the business. And just specifically, we have zero unstated concerns.

Great, great. Thank you. And last question real quick. On the case growth, I think in the last quarter, you had a pretty balanced new account versus share of wallet. But if you could just update us there, where the case growth is really coming from at this point in the independent side.

Yeah, we continue to be excited about our focus and our growth there. In fact, on the independent side of the business, just within the last couple of weeks, we have shipped a record number of customers in the history of the company. So our focus is playing off, you know, the success that we've had here for many, many quarters and the intense focus our organization has on growing that segment of the business. You know, we see new customer generation in the, you know, mid-single digits, mid-to-upper single digits, and I expect that will continue through the course of time.

Great. Thank you very much. Thank you.

Your next question is from John Heinbacher of Guggenheim Partners. Please go ahead. Your line is open.

Hey, Dave, I wanted to start with maybe your thoughts on hitting on the last topic there, the existing account penetration opportunity, and particularly COP, right? If that is an outsized opportunity, how do you attack that? And then do you think the, you know, you've got enough sales resources, you know, to maybe get more intense, right, with those existing accounts, so you'd like to add some sales resources?

Yeah, I think, John, great question. Look, I'll take the second part of your question first is we will always have room for strong salespeople inside U.S. Foods, and that's something we'll continue to focus on adding the right level and the right number of talent per market where we see the greatest growth opportunities. There are no barriers to our success being driven by me or anyone else in the organization. Our teams understand that where we can find strong sales talent, competitive talent or not, we've got room for those folks inside the company. So you'll continue to see us add prudently and specifically where we see the growth opportunities. On the COP side, I mean, we have StockGuard, we have great brands inside the company. We have really good momentum there. And I think it's certainly center of plates, always a focus when you're looking at new accounts. And obviously if we get into an account where we haven't led with COP, we get it in there as fast as we can. It's front and center to how we go to market. And as I said, I've got great brands here that the company has built through the course of time. So we lead with confidence in COP. Okay.

And then maybe secondly, right, when you think about the supply chain capacity, right, obviously, you know, you've got one ecosystem. How do you think or how would you characterize capacity today? And I don't know how many expansions you're working on or foldouts, but do you anticipate bringing new capacity on in the next year or two, three?

Yeah, we will look opportunistically at that. First of all, what's important to me, and I learned this early in my career working for a large chemical company, you've got to make sure you can justify that next increment of capacity based on the profitability segment of the business and where you're looking at. So that's something we'll make sure we're doing well. But we have no constraints in terms of adding capacity where it's needed. We understand where our growth opportunities are. There are a few markets where we're pinched on capacity today that we're looking at deciding what to do. But there are no barriers to our success right now driven by capacity limitations.

And that's always an area we're looking at, John, to really – we brought on two facilities in the past year and, as Dave said, continue to look ahead. So that's always front and center. And that's also why growing what the – target customer types is important because when you think about optimizing inventory, throughput, et cetera, those use your capacity pretty effectively.

Okay, thank you. Thank you.

Your next question is from Brian Harbor of Morgan Stanley. Please go ahead. Your line is open.

Yeah, thank you. Good morning. I just have a question more on the operating expense side. Maybe if you could talk about labor productivity. Certainly part of that is just getting more tenure, continuing to see improvements in retention. But are there any other specific initiatives you think can continue to drive labor productivity? And then separately, are there any other kind of expenses that you still think are elevated within that line? if there's any sort of maintenance cost or fleet-related type of things that we could think about, you know, how those might change for the rest of the year?

You know, first of all, you know, we're quite pleased with the leverage we got in the P&L this quarter and just seeing the strength of our GP growth versus our operating expense growth continues to improve. We're not there yet. We're not at the promised land, but I'm really pleased with the work we have and the initiatives going on. You know, in addition to the couple that you mentioned in terms of turnover and all that, the things that I talked about in the prepared remarks, like our flexible scheduling, you know, will enable us to get more productive use of our associate base, you know, across the company. That's why we've got these additional pilots going on and with plans to further expand that, you know, through the back half of the year. Obviously, new employees, the less tenured folks aren't as productive. It takes time for that to happen. And The better job we do at retaining our associates and keeping them with us, the faster that productivity will improve. But beyond that, we have a lot of initiatives going on at just SG&A productivity, getting more efficient at what we do, anything from corporate to the field, and the teams aligned around that work. So we feel good about it. Thank you. Thank you.

Your next question is from John Ivanko of JP Morgan. Please go ahead. Your line is open.

All right. Thank you. Maybe a little bit of a follow-up on that. David, towards the end of your prepared remarks, you talked about indirect spend. I forget the word, but maybe that being an untapped or an unrealized or even unpursued opportunity for the company at this point. Total OPEX dollars in the company in 22 are around $4.5 billion. How much of that do you think would classify as indirect spend? And how big of a prize, if you want to call it that, can you really pursue from an efficiency and effectiveness point of view as we begin to think about 24 and beyond? Yeah, we're excited about that.

I'll flip it over to Dirk to answer that because he's knee-deep in that work right now.

Thanks. Good morning, John. Good question. So as Dave said, really focusing on this. Think of this as the strategic vendor management instead of a COGS, it's indirect. And so we haven't given a specific number, but it is a pretty large base. So we think, just like we haven't quantified the components of the different areas of the long-range plan, we would not call it out if it's not meaningful. And so that work is underway and expect to begin those savings to accrue later this year and into next year. And it's really an area that we've focused on in limited capacity here and there, and this is a more holistic approach that we're taking. So excited about the work that will come out of this, and we think that that's part of what will allow us to continue to invest in the business and at the same time accrue dollars to the bottom line for earnings growth.

And strategic vendor management, I mean, that's not new for you guys, but can you talk about maybe some of the newer, bigger ideas, you know, that are coming up that, you know, that maybe you are working on that we might be able to see between now and the end of 23? Or is it still too early to name those, even if you're working on them?

Strategic vendor management is really, it's a continuation of the same process that we've talked about over the last year. It's continuing to work with different vendors, though. And it's really a collaborative process with those vendors and It's all the way from how do we find joint opportunities to grow? Are there opportunities to consolidate spend? Are there opportunities for us to be a better customer to those vendors that result in improved cost of goods? So there's not anything new as opposed to it's a very thoughtful and methodical approach to work through our cost of goods base.

Yeah, it's really a partnership with them, as Dirk said, to take cost out of the supply chain jointly in a collaborative manner. I think the opportunity there isn't new initiatives. As we said, we plan to be through about 60% of our COGS this year. I think that number through the end of last year was about 40%. So that's really the opportunity.

And in terms of addressing the indirect spend, is there anything that we can talk about outside of strategic vendor management? I mean, something that might be new to talk about on this call? Or is that still behind closed doors?

We'll talk a little more specifically, but the way to think about indirect spend is whether it's Facilities to travel to consulting sort of all those kinds of cost base. So there's there's not a single as opposed to it's looking at across 15 or 16 different types of categories of spend and being thoughtful those opportunities to spend more effectively. So, more to come in the future as we get a little further into that. Then that was also as a later starting initiative in our long range plan. That's why we're beginning to talk about it now.

Okay, thank you understood now. Thank you. Thanks, John.

Your next question is from Andrew Wolf of CL King. Please go ahead. Your line is open.

Thanks. I have a couple follow-ups. First on, Dirk, the inflation commentary that you haven't had accelerating or, in fact, you've had decelerating product cost inflation for now a few quarters, and yet your gross margin has kind of improved against that. Can we infer from that that you're you've successfully kind of lapped the toughest comparisons of holding gains in periods when inflation was accelerated, inventory holding gains?

Yes, yes, for sure. And I think that, you know, Andrew, to your question is that's why we have been so deliberate in our commentary last quarter and this quarter and why we focus so much on sequential inflation and talking about sequential because when people, when you're just looking at year over year, the fact of what happened a year ago is less important on what's driving right now. So back to my earlier comment with the gains that we continue to see, the strong gross profit we continue to see, that's all the initiative work that we've driven through there. that is resulting in us continue to deliver these good results in gross profit. And as we continue to push our initiatives forward, we would expect to continue to have, again, for 2023, a strong gross profit and gains over 22, even though last year had the inventory gains and this year doesn't. That was all contemplated in our outlook and how we think about the business.

Got it. Thank you. And on the operating expenses, you know, and improving the supply chain and really getting productivity up just generally, you know, it's, it's obvious that whole industry had to, you know, increase wages and training and hire new people. I mean, so there was a lot of costs before the benefit, but you know, Dave, I think you mentioned, you know, you're, you're close to how far away, I guess the question is, you know, you have pretty impressive, you know, operating expense leverage against that much, much case growth and, How close are you to sort of an optimal supply chain for the things you can manage, like getting productivity where you want it to be and so forth?

We have a lot more to do in that regard. I'll just leave it at that. We've got good momentum. We're focused on the right things. The trajectory is good. We've got a lot of positive momentum, but more results to come.

Thanks. I realize there's a lot of internal things that were in process and I'm sure you're, you and others have new ones. Um, but specifically in terms of like the investment that had to be made, you know, just to get capacity where it needed to be, uh, in training people and, you know, people becoming seasoned, just that in a microcosm, not all the other stuff, which is on top of that, but just sort of officially operating a warehouse and routing, um, you know, Is that also a lot to come, or are you just more referring to internal initiatives that go beyond that?

I think it's both. I think Omicron, through the industry, a curveball. We've all been struggling with that for the past two, three years. You heard me talk about driver productivity and retention is about where it was pre-COVID. We're not quite there yet in the warehouse, so more to come on that sort of stuff. And then you couple that with the initiatives that we have going on. That's kind of informed my earlier comment about more to come. Got it. Thank you. Thank you.

There are no further questions at this time. I will now turn the call over to Dave Flitman for closing remarks.

Well, thank you all for joining us today. We hope you have a great rest of the week. The company is strong. We have great momentum and a very bright future. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.