US Foods Holding Corp.

Hey, everyone, and welcome to the U.S. Foods Third Quarter 2023 Quarterly Earnings Call. Today's call is being recorded, and I would now like to turn the conference over to Mike Reese, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, Lisa. Good morning, everyone, and welcome to the U.S. Foods Third Quarter Fiscal 2023 Earnings Call. On today's call, we have Dave Flitman, CEO, and Dirk LoCascio, our CFO. We will take your questions after our prepared remarks conclude. please limit yourself to one question and one follow-up. Our earnings release issued earlier this morning in today's presentation slide can be found on the Investor Relations page at our website at ir.usfoods.com. During today's call, unless otherwise stated, we're comparing our third 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. We are excited to announce that we will host an investor day here in the Chicago area on June 5th of next year. Where we will outline our strategy and the key drivers of our new long range plan beyond 2024. Along with our cash flow generation and capital deployment plan. More details will be sent in the following month. Lastly, during today's call, we will refer to certain non gap 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 presentation slides posted on our website, except that we are not providing reconciliations to forward-looking non-GAAP financial measures. Now I'd like to turn the call over to Dave.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. Before jumping in to our Q3 highlights, I want to officially welcome Mike Neese as our new Senior Vice President of Investor Relations. Mike brings 25 years of investor relations experience to U.S. Foods, including time with Performance Food Group and Builder's First Source. I am thrilled to team up with him one more time. Additionally, Martha Ha joined U.S. Foods in late September as Executive Vice President and General Counsel. With more than 30 years of experience, Martha is a seasoned business advisor with exceptional expertise in corporate governance, commercial and M&A transactions, and leading high-performing teams. I look forward to Martha's many contributions to the company. And now, let's turn to today's agenda. I'll start by sharing highlights for the quarter and our progress against our strategy and long-range plan before I hand it over to Dirk to review our financial results and updated fiscal 2023 guidance. In the third quarter, we continue to make significant progress against our long-range plan broadly across the business. We are improving the safety of our associates, growing our independent cases while accelerating market share gains, enhancing our margins, driving increased cash flow, and meaningfully reducing our net leverage. Our strong third quarter and year-to-date performance are a result of our continued growth in market share gains on our target customer types, accelerating operational efficiencies, and the dedication of our 29,000 associates. I am proud of their relentless focus on delivering best-in-class service to our customers and executing strategic initiatives under our long-range plan. Building on our differentiated team-based selling model, industry-leading digital innovation, and continuing momentum, our team delivered strong case volume growth. Each of our target customer types, independent restaurants, healthcare, and hospitality had year-over-year market share gains. Importantly, we accelerated our independent share gains in exclusive brand penetration sequentially, resulting in our 10th consecutive quarter of year-over-year share gains in this important customer type. We demonstrated profitable growth and margin expansion during the quarter with meaningful improvement in operating leverage. We delivered adjusted EBITDA growth of 15% and expanded our adjusted EBITDA margin by 50 basis points. Finally, we accelerated cash flow generation, allowing us to invest more in the business, pay down debt, repurchase shares, and execute tuck-in M&As. Turning to slide 4, our strategy guides how we operate and what we focus on to win at U.S. Foods under our four pillars of culture, service, growth, and profit. We continue to reap benefits from the inclusion of our four regional presidents on my executive leadership team. We are communicating better and aligning our teams more effectively to ensure faster execution. One important example is a recent decision I made to further streamline the organization and address feedback from the field by having our local sales teams report into the regional presidents versus a centralized corporate commercial function. Also, Jim Sturgill, our EVP and Chief Commercial Officer, has informed me of his decision to retire effective December 1st. Jim has been a trusted leader and voice on my executive leadership team. During his more than 31 years with the company, Jim has made countless contributions to propel our company forward. I want to thank him for his steadfast leadership and his many contributions to our company and our people. After much thought and careful consideration given Jim's pending retirement, I've decided to not backfill Jim's role. Instead, we have restructured our commercial team to create even greater collaboration a more streamlined structure, and the platform for accelerated execution of our strategy. As a result, Randy Taylor, our EVP of Field Operations, has taken on additional responsibilities for sales excellence and marketing. In addition, Dave Poe has been promoted to EVP Chief Merchant, reporting to me. Dave is a seasoned food service veteran with more than 25 years of merchandising experience within distribution. And Dave's expanded role, he will continue to be responsible for ensuring the US foods product value proposition exceeds our customer expectations. That we are competitive on cost of goods, and that we have the right product portfolio through his leadership of our merchandising function. In addition to the organization changes we are making, we continue to place increased emphasis on accelerating profitable growth. And we want to ensure that we reward our sellers for delivering on that growth. We are currently working on some likely revisions to our territory manager sales compensation plan, which will even more closely link their compensation to the key elements of our profitable growth plan. We will share more about any potential modifications during our fourth quarter call. We are also accelerating our investment in our local selling capacity. In fact, we increased our local seller headcount each month in the third quarter. We plan to continue those additions in the low to mid single digits into 2024 and beyond, which has already been contemplated in our long range plan. We will be more focused than ever on profitable growth with the right tools and support processes to ensure our sales teams are successful. Collectively, these changes will ensure better alignment between the field and corporate teams while reducing handoffs and creating additional organization efficiencies. Most importantly, they will further propel our company with the right focus on serving and supporting our customers and driving profitable organic growth. Turning to slide five, I'll now briefly discuss our third quarter progress against our culture and service pillars, and then Dirk will talk about the growth and profit pillars a bit later. The safety and well-being of our associates is paramount at US Foods and is critical to our success. Since day 1, I have stressed the importance of improving our performance to provide an even safer operating environment for all of our associates. Our strong results have been driven by our actions to execute more effectively on fewer but more impactful initiatives while reinforcing safety as a personal value. One example is our safety leadership training, where we will provide behavior-based safety process training to approximately 1,300 operation leaders by the end of this year. This example, combined with other initiatives, has led to steady improvement in our safety performance. Our results improved in the third quarter compared to both the second quarter of this year as well as the third quarter of last year. In fact, the 3rd quarter was our best safety results since the 1st quarter of 2021. With our injury and accident frequency rates, both better than the prior year by 25 to 30%. However, there's more work to be done and we won't rest until we're at 0 accidents and injuries. Turning to the responsible portion of our cultural pillar. Through our recently published fall scoop, we rolled out a new climate-conscious product innovation category within our ServeGood portfolio. ServeGood features products that meet our sustainability criteria, including products that are responsibly sourced or contribute to waste reduction. When asked, nearly two-thirds of our customers say that it is important to them to make sustainable choices that limit their impact on the environment. One example is our newly unveiled monogram carbon negative cutlery that utilizes greenhouse gas derived biomaterial to create a negative carbon footprint. These climate conscious innovative products aim to support our plan to reduce greenhouse gas emissions. We're excited to have nearly 1,000 products in our Serve Good portfolio, which spans multiple product categories. Additionally, we are focused on winning center of the plate proteins and fresh produce. And over the last several years, we have upgraded our assortment in these key product categories. Importantly, our fresh produce category is our fastest growing category year to date. And we estimate we have captured approximately 400 basis points of market share over the last 2 years within our target customer types of independent restaurants, healthcare and hospitality. I am proud of our sustainable and healthy offerings that will ensure we continue to meet our customers' current and evolving needs. Moving to slide 6, we continue to focus on best-in-class delivery, specifically on-time and in full service levels to our customers. We continue to improve our customer service levels for product availability, and we are essentially now at pre-COVID levels. On-time service to customers is also a key focus area for us, and our new routing system pilot, as part of the broader routing optimization work we have had underway, is a prime example of how we can further improve service. We launched the Descartes Routing Pilot in our first market. We continue to learn from this pilot and intend to pilot a second location before year-end, with national implementation planned for 2024. Our routing improvement initiative, combined with our move to Descartes, will enable us to improve service levels to our customers while also reducing miles driven and fuel consumption, as highlighted by our third quarter performance, where we delivered the best cases per mile in our company's history. In addition, our flexible scheduling initiative is making solid progress as we have moved from the pilot phase to broader deployment across our network, and it's now live in 16 locations. We continue to see significant improvements across our network and especially in our pilots, including year-over-year reduction in turnover that is approximately twice the rate of improvement versus our other locations, 30% improvement in safety, and continued improvement in productivity. We remain on track for half of our locations to be live on flex scheduling by year end. Finally, we also continue to invest in our market leading customer facing digital technology with Moxie. Our agile development has delivered many improvements to make it even faster for customers to place orders and manage their business. Our deployment to local customers is complete and we now have 30% of our national customers on Moxie with full deployment planned in the first half of next year. In terms of the digital customer experience, we believe we continue to lead the industry. Our net promoter score has been strong since our launch and has improved even further recently. From an e-commerce penetration perspective, we're at 84% for the total company and our locally managed business improved 50 basis points to 73%. Moxie is well on its way to being the premier all-in-one digital toolset for our customers to order, track deliveries, pay bills, and manage inventory. And as we continue to focus on the customer experience, we further expanded Pronto in the quarter, which is our small truck delivery service focused within targeted, dense geographies. Today, Pronto has a presence in 35 markets. I am pleased with our progress and the return on the investments we are making to provide best-in-class service to our customers. Turning to slide 7, I'll walk through some third quarter highlights and Dirk will go into a little more detail later. Total case volume growth was 4%, and we drove growth in each of our target customer types again this quarter, with volume increasing nearly 6% for independent restaurants, 8% for healthcare, and 6% for hospitality. Adjusted EBITDA grew double digits and margins further increased. We remain focused on increasing our gross profit per case faster than operating expense per case and accelerating profitable share growth as we did this quarter. Both healthcare and hospitality continue to deliver strong growth driven in large part by healthy net new business. We remain focused on growing in our target customer types and expect to continue that momentum. I've already spoken about several of the good progress points with our customer experience and supply chain, so I won't be repetitive here. Moving on, we continue to strengthen our capital structure and prudently allocate capital to fuel long-term growth. We further reduced our net leverage to 2.9 times, and we repurchased more than 700,000 shares for $29 million. We expect to remain below 3 times levered for the remainder of the year with further improvement into next year. Finally, we closed the Renzi acquisition earlier in the third quarter. And this morning, we announced the acquisition of Saladinos, our second tuck-in acquisition this year. Saladinos is an independent food service distributor in Central California with approximately 600 million dollars in annual revenue that will provide additional scale for us in Central California. We expect to close the transaction by year end. We have strong momentum as we finish out 2023, and we expect that momentum to carry us into 2024. Before I hand it over to Dirk, I would like to acknowledge the brave men and women who have served in the Armed Forces. On Veterans Day this Saturday, we will celebrate our 1,500 associates who have so courageously served our country, and you can see some of their faces on slide 8. We are grateful for their service and celebrate them and all veterans on this important day. We are committed to supporting veterans in their transition back to civilian life. They offer skills that are remarkably competitive and transferable to the work we do in food distribution, including drivers, selectors, supervisors, and corporate roles. We have an employee resource group dedicated to educating our associates on the value of a veteran, recruiting veterans, supporting and recognizing our U.S. foods veterans, and providing volunteer and community engagement opportunities. I would like to recognize Jennifer Castillo, who is president of the Those Who Serve Employee Resource Group. Jennifer is a senior manager in merchandising excellence who served in the U.S. Navy and successfully transferred her skills in mass communications to the corporate world. We thank Jennifer for her efforts in leading this valuable employee resource group and all veterans for their service to our country. And we wish all of those who have made personal sacrifices to protect our freedoms a very happy Veterans Day. With that, I'll hand it over to Dirk to go over our financial performance and guidance in further detail.