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.