US Foods Holding Corp.

session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you, and I will now turn the conference over to Mike Neese, Senior Vice President of Investor Relations. You may begin.

Thank you, Abby. Good morning, everyone, and welcome to U.S. Foods' third quarter fiscal 2025 earnings column. On today's call, we have Dave Flipman, our 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 can be found on the IR page of our website at ir.usfoods.com. During today's call, unless otherwise stated, we're comparing our third quarter of fiscal year 2025 to the same period in fiscal year 2024. In addition to historical information, certain statements made during today's call are considered forward looking statements. Please review the risk factors in our Form 10-K for a detailed discussion of the potential factors that could cause our actual results to differ materially from those anticipated in forward looking statements. Lastly, during today's call, we will refer to certain non-GAAP financial measures. All reconciliation to the most comparable GAAP financial measures are included in the schedules on our press release, as well as in the presentation slides posted on our website. We are not providing reconciliations to forward-looking non-GAAP financial measures. Thank you. I'd like to turn the call over to Dave.

Thanks, Mike. Good morning, everyone, and thank you for joining us. Let's turn to today's agenda. I'll start with our third quarter and first nine months results. I'll then hand it over to Dirk to review our third quarter financial results and our updated fiscal 2025 guidance. Turning to slide three, we delivered strong financial results for both the third quarter and year to date. Our performance aligns with our long range plan algorithms, underscoring the strength of our execution. For the first nine months, we delivered 4.4% net sales growth, 10.9% adjusted EBITDA growth, 29 basis points of adjusted EBITDA margin expansion, and 26.7% adjusted EPS growth. These results reflect our team's focus on and ability to consistently deliver sustainable growth, which is a testament to our operational rigor and long-term value creation. I thank our associates for their commitment to our customer success and to serving them with excellence. Moving to slide four, we delivered a double-digit adjusted EBITDA increase this quarter alongside a notable acceleration in independent case growth. These results demonstrate our continued ability to deliver earnings growth through consistent share gain and margin expansion. Now that we're a quarter of the way into our three-year long-range plan, I'm even more confident in achieving our algorithm. We're focused on delivering long-term shareholder value and disciplined capital allocation, investing for growth while executing share repurchases, and targeted tuck-in M&A. Today, we announced an agreement to acquire Shitakis, an independent food distributor based in Las Vegas with strong market share in casinos and independent restaurants. This is our fifth acquisition in two and a half years and aligns perfectly with our Tekken M&A strategy. Now let's turn to our case growth and the industry backdrop. We gained share with independent restaurants again this quarter as case volume grew 3.9% in line with our full year guidance range of 2 to 5%. Notably, we gained share each month of the third quarter. Independent case growth accelerated by 120 basis points from Q2 to Q3, reflecting strong momentum and outperforming the broader market. We exited the quarter on a high note as we grew approximately 4% on an organic basis in September, and that momentum carried through October. During the third quarter, we achieved our strongest performance of the year in net new independent account wins. which grew approximately 4.4% over the prior year. This was our highest net new account growth rate since the second quarter of 2023, and we expect this momentum will continue. Additionally, healthcare and hospitality are helping to drive our overall volume growth with 3.9% and 2.4% case growth, respectively. We have new business wins in both customer types coming on board throughout the fourth quarter, supporting further growth. We continue to gain market share with our target customer types of independent restaurants, healthcare, and hospitality. This is our 18th consecutive quarter of market share gains with independent restaurants and the 20th consecutive quarter with healthcare. Turning to our chain business, volume declined by 2.4%, a 160 basis point sequential improvement over the second quarter. That acceleration was ahead of restaurant industry foot traffic, as reported by Black Box, which improved roughly 60 basis points, but was still down half a percent in the third quarter. Turning to our strategy, we are guided by our four strategic pillars, and I will discuss progress on each over the next several slides. Moving to slide five, our first pillar is culture. We remain committed to achieving zero injuries and accidents for our associates. In the third quarter, our injury and accident rates improved by 16% compared to the same period last year. And over the past two years, we have improved our safety performance by 35%. There is still work to be done, and we will keep pushing forward to ensure every associate goes home safely every day. We're proud to announce a new partnership between U.S. Foods and Hiring Our Heroes, a nationwide initiative of the U.S. Chamber of Commerce Foundation dedicated to connecting transitioning service members, veterans, and military spouses with meaningful career opportunities. This partnership will accelerate military hiring and reflects our deep commitment to honoring military service and strengthening our workforce with the talent leadership, and dedication that veterans and military families bring to companies like U.S. Foods. Turning to slide six, our second pillar, service. We remain focused on providing reliable, on-time deliveries that customers can count on. Our commitment to service excellence is reinforced by our flagship MOXIE e-commerce platform, which enables us to deliver a transparent, best-in-class experience tailored to the evolving needs of our customers. Broadly, we are deploying AI across our business to enhance the experience of both our customers and our associates. This includes within Moxie, where this quarter we launched AI-powered search, a significant upgrade that's already delivering measurable results. Customers are finding products faster and more intuitively, leading to a 3% higher conversion rate of products added to their cart and purchased. resulting in approximately 1.3 million incremental cases on an annualized basis. Importantly, this upgrade is also improving seller productivity by surfacing more relevant and higher quality search results. Turning to supply chain, we are improving routing productivity through the Descartes rollout across our distribution network. We are now live or actively deploying in all markets. In Q3, we achieved a 2.3% improvement in cases per mile compared to last year. Our UMass deployment is delivering value across our safety, service, and profitability key results. We continue to make meaningful progress on our operations quality composite, which measures our ability to deliver products to our customers without errors, with performance improving by 24% compared to the prior year. These results reflect our commitment to improving our customer service experience. Turning to slide seven, growth. We're accelerating profitable growth and expanding market share across our target customer types. A key driver of this growth is our Pronto small truck delivery service. The Pronto program is now expected to deliver approximately $950 million in sales this year in more than a $1 billion run rate. by year-end. Pronto Legacy is now live in 46 markets, with plans to expand into three more markets next year. Significant growth opportunity remains as we add more trucks to many of these markets. In parallel, we expanded Pronto Penetration to more than 20 markets, deepening our share of wallet with current customers. This initiative doubled delivered a double-digit percent uplift in overall case growth among participating customers during the third quarter. Given the success of Pronto, we plan to make our largest annual investment in the program in 2026 to fuel future growth. In addition to Pronto, we continue to invest in the business to support growth and drive operational efficiencies. As we discussed last quarter, We began limited shipping from our first new semi-automated facility in Aurora, Illinois, and we continue to ramp up volume served out of this facility. To date, we have transitioned approximately 50% of the volume out of our former facility into Aurora and expect to be fully operational over the next several months. We will leverage our early learnings and use these insights to help guide our approach as we plan and execute future semi-automation rollouts in select distribution centers. In August, we held our Food Fanatics Live Show, which was our largest customer event ever. We hosted more than 3,500 customers and prospects over two days, showcasing each area of our customer value proposition. We expect more than $150 million in potential new customer wins coming out of this event, with nearly half of that realized to date. Additionally, we're in the process of onboarding more than $100 million of annualized new business wins in healthcare and hospitality by leveraging our expertise, differentiated model, and unique digital capabilities. Our tools and technology, like our vitals program, which is our proprietary technology suite that helps healthcare operators solve some of their biggest challenges, are easy to use and generate real results. For example, this year we're on track to complete approximately 4,500 individual customer interactions leveraging tools within Vitals, which helps our customers save 5% of their total costs on average. Looking ahead, we believe that we will further accelerate our profitable growth and share gain momentum through two important changes. One to our seller's compensation structure and one to our team-based selling approach. Starting with sales compensation. In January of 2024, we returned to a 50-50 split between base salary and variable compensation for our local sellers, reinstating the structure we had in place prior to COVID. Otherwise, the core sales compensation framework has remained largely unchanged for the past eight years. Over the past year, we've conducted a thoughtful review of our sales compensation model through the lens of further accelerating growth while fueling seller success. We're excited to announce that we will be transitioning to a 100% variable compensation structure for our local sellers. The new incentive structure will continue to be based on gross profit dollar growth with their total compensation uncapped. Additionally, The new compensation model will reward sellers for accelerating independent case growth, private label penetration, and pronto volume growth. We're conducting pilots in several markets during the fourth quarter, and we will use those learnings to inform our full deployment in early 2026. We believe these changes will accelerate profitable volume growth while creating greater earnings potential for our sales force. In parallel, we've streamlined our team-based selling model to better reflect what customers value most from U.S. foods and where we truly differentiate quality products, excellent service, and industry-leading technology. As part of this change, we've transitioned individuals in some sales support roles into customer-facing seller positions, bringing our expertise closer to the customer. Initial feedback from our sales team has been positive on both the compensation change and the role realignment. Moving to slide eight, our profit pillar. Our consistently strong execution resulted in adjusted gross profit growth in the third quarter and across the first nine months of the year. Third quarter, adjusted gross profit reached $1.8 billion, a 6.4% increase over the prior year. This growth was fueled by increased volume, improved cost of goods, and inventory management. Our strategic vendor management initiative is now on track to deliver more than $120 million in cost of goods savings for 2025. These results reflect our disciplined approach to sourcing and supplier partnerships. As we realize these benefits, we're reinvesting a portion of the savings to fuel growth by supporting innovation, expanding customer relationships, and strengthening our competitive position in the market. Private label penetration among our core independent restaurant customers grew again this quarter and was over 53%. By helping customers offset inflationary pressures with lower costs, our private label offerings continue to strengthen loyalty and differentiate U.S. foods in a highly competitive market. We are also improving operating expense productivity through UMOS and our enterprise routing initiatives, including market-led routing and our Descartes deployment. These initiatives help support our ongoing commitment to driving 3% to 5% annual productivity well into the future. In summary, I am pleased with the progress we made in the first nine months against the four pillars of our strategy and remain confident in our ability to deliver on our long-range growth algorithm. Before I pass it to Dirk, I want to recognize one of our outstanding associates, a veteran of the U.S. Marine Corps, Kevin Connolly. As warehouse manager at our Albany, New York distribution center, Kevin has been instrumental in driving operational excellence. Since stepping into the role nearly a year ago, he's led improvements in cross-functional communication and execution across sales, inventory replenishment, and operations. By elevating key frontline deliverables of operational quality composite and inventory accuracy, Kevin and his team have successfully reduced errors and delivered year-over-year improvement in shrink, a testament to disciplined leadership and a commitment to continuous improvement. As a result, the team successfully reduced errors per thousand and delivered a significant improvement in inventory management within the Albany facility. As Veterans Day approaches next week, we pause to honor and recognize the members of our team who have served in the U.S. Armed Forces. We are incredibly grateful for your selfless service and your personal sacrifice for our country. Thank you, Kevin, and thank you to every veteran, past and present. Your courage and dedication inspire us all. Let me now turn the call over to Dirk to discuss our third quarter results and our updated 2025 guidance.

Thanks Dave and good morning everyone. This quarter we delivered a combination of top line growth and margin expansion, once again demonstrating the power of our strategy and execution. Our unwavering commitment to continuous improvement and operational excellence continues to advance the service experience we provide to our customers while improving our overall financial performance. These results reflect our focus on creating long-term value for our shareholders and building a more resilient, customer-centric business. Moving to our third quarter performance on slide 10. Net sales increased 4.8% to $10.2 billion, driven by case volume growth of 1.1% and food cost inflation and mix impact of 3.7%. If you exclude the fresh whey divestiture impact, total case growth was approximately 1.6%. Independent restaurant volume growth accelerated 120 basis points from the second quarter, increasing 3.9% year over year, which includes 40 basis points of M&A. Healthcare performed well, growing 3.9%, and hospitality was up 2.4%. We lapped some larger wins in hospitality from the prior year and continue to see growth supported by a strong pipeline. Our chain restaurant volume improved 160 basis points sequentially, but remained down 2.4% compared to prior year, primarily due to the strategic exit that we discussed last quarter, partially offset by the recent onboarding of new business wins. Shifting to our financial performance, we delivered earnings growth and drove margin expansion again this quarter. Adjusted EBITDA of $505 million increased 11% through a combination of volume growth, gross profit improvement, and operating expense productivity. As a result, adjusted EBITDA margin expanded by 28 basis points. Finally, adjusted diluted EPS increased 26% to $1.07 per share We expect to continue growing adjusted EPS at a meaningfully faster rate than adjusted EBITDA through a combination of earnings growth and share repurchases. Returning to slide 11, our focus on driving continuous improvement resulted in another strong quarter of operating leverage gains. Adjusted gross profit per case improved 41 cents, or 5.2% compared to the prior year. This was driven by our progress on various gross profit initiatives, including strategic vendor management and inventory loss reductions that Dave addressed earlier. Our inventory management initiative is on track to generate $35 million in savings for the full year. This initiative focuses on reducing losses from product that can't be sold due to damage or spoilage through improvements in process and insights. We've made strong progress and expect to drive additional savings in 2026. Adjusted operating expense per case increased 22 cents or 3.8%. We are offsetting a portion of operating cost inflation by driving productivity improvement in both operations and administration through eliminating waste and supply chain and instituting greater process discipline across the business. Both gross profit and operating expense include an approximate $0.07 per case year-over-year increase related to the Food Fanatics live show versus these amounts being spread out across quarters in the prior year. Our third quarter and year-to-date performance demonstrates our ability to drive meaningful leverage through the P&L and deliver consistent financial results in a dynamic environment. As a result of the strong execution of our strategy, adjusted EBITDA per case increased 21 cents or 9.9% to $2.33. Turning to cash flow and capital allocation on slide 12. Our robust operating cash flow combined with our strong balance sheet enables us to deliver on our capital allocation priorities. Year to date, operating cash flow increased by $185 million to nearly $1.1 billion, driven by earnings growth and a reduction in tax payments. We continue to fund strong capital investment, which ensures the vitality of our business, promotes healthy growth, and generates attractive returns. And we remain focused on our capital allocation priorities to maintain net leverage within our target range of two to three times, return capital to shareholders via share buybacks, and opportunistically pursue a creative tuck in M&A. During the third quarter, we repurchased approximately $335 million of shares. And to date in 2025, we have bought 7.6 million shares for over $600 million and have $467 million remaining on our $1 billion share repurchase authorization. We ended the quarter at 2.6 times net leverage. Our debt structure is strong, and we have no long-term debt maturities until 2028. And finally, subsequent to quarter end, we signed a definitive agreement to acquire Shiitakes, an independent food distributor in Las Vegas. Now turning to our guidance and modeling assumptions on slide 13. Given our year-to-date performance and outlook for the remainder of this year, we are updating our fiscal year 2025 guidance. Given the continued lower restaurant foot traffic and dynamic macro environment, we are tightening our total case volume growth to 1% to 2% from 1% to 3%. We now expect net sales growth to be in the range of 4% to 5%. Due to our solid progress this year and our ability to deliver profitable growth and enhanced margins, we are now projecting adjusted EBITDA growth of 10% to 12%. We are increasing the low and high end of our guidance for adjusted diluted EPS, and we now expect adjusted diluted EPS growth of 24 to 26%. I am pleased with the progress we've made this year in executing across our business. We are growing our top line, gaining share, expanding margins, and deploying our strong cash flow toward our capital priorities. Our disciplined approach to strategic investment, operational efficiency, and shareholder returns positions us well for sustained success, and we remain fully committed to achieving the financial targets outlined in our long-range plan. With that, I'll now pass it back to Dave for his closing remarks. Thanks, Dirk.

Our third quarter and year-to-date results are strong. We're accelerating independent case growth, sharpening our focus on productivity and operational excellence to better serve our customers, and consistently delivering top and bottom-line growth. We have a clear ambition to become the undisputed best in our industry. We have the right strategy and the right initiatives in place, and we will continue to execute with discipline and purpose in support of our customers, our associates, and our shareholders. Our most important differentiator, however, remains our strong and highly talented team. I couldn't be more pleased or proud of how our 30,000 associates embrace our ambition. In my 40-plus year career, I've not witnessed the level of alignment, dedication, and passion that our associates bring each and every day to help our customers make it. Their commitment to our success is the heartbeat of our company and the foundation of everything we're building for the future. Before we move to Q&A, I do not have any new information to share regarding a potential combination with PFG. We will not be taking any questions on that subject today. Let me finish by underscoring how highly confident I remain in our standalone future and ability to deliver our long-range plan and financial algorithm, which, as a reminder, is a 5% sales CAGR, 10% adjusted EBITDA CAGR, at least 20 basis points of annual adjusted EBITDA margin expansion, and a 20% adjusted EPS CAGR, through 2027. And we will remain disciplined as we execute our capital allocation strategy, which will enable us to be a consistent double-digit earnings compounder for many years to come. With that, Abby, please open up the line for questions.

Thank you. And we'll now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star 1 a second time. If you're called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question and one follow-up. Again, It is star one if you would like to join the queue. And our first question comes from the line of Edward Kelly with Wells Fargo. Your line is open.

Hi. Good morning, everyone. Thank you for taking my question. Dave, your execution in this backdrop, you know, has been very strong, obviously, and you're demonstrating share gains. I wanted to ask you about overall total case growth, you know, which still remains somewhat sluggish. um full year guidance there you know we found just a touch um so i'm curious if you could maybe talk to us about um you know some of the incremental pressure that you might be seeing outside of the independent channel where things are going very well and maybe as part of this could you talk about quarter to date commentary and what your thinking is in on q4 sure let me start with independence and then just point out you know i feel really good about our momentum

You know, we just put up the strongest number we have in the last seven quarters on independent restaurants and a backdrop that remains, I would describe it as sluggish. You know, we haven't been anywhere close to historical foot traffic in this industry for most of my tenure here at the company, and yet you continue to see us execute very, very well. You know, Dirk commented about the fresh waste sale and the 50 basis points roughly impact that had on our total case growth. right in the middle of our prior range had we not made that divestiture. So underlying momentum is still very strong. For the quarter, you know, I was pleased to see that we gained share each month of the quarter and, importantly, you know, finished at the strongest growth rate in September, which, as I commented, carried over into October. I'd say, you know, with the government shutdown, you know, some choppiness out there and just Just remind everyone that we are over-indexed with government business. It shows up in our other category through our GPO relationships. We serve a lot of military bases. And it's not as much just the impact on that volume. I think it's more about people not knowing if they're going to get paid and not going out to eat and all the things that are impacting the local markets there up and down the East Coast. But that's going to correct itself. And what we're focused on is the same thing we've been focused on for the last three years is controlling our own destiny through our own initiatives and importantly, taking share consistently, which we continue to do. And I fully expect that that's going to continue.

Great. And then, you know, along the lines of control your own destiny, Dave, I was hoping that you could provide a little bit more color around the change in Salesforce compensation. I don't think it's unique, you know, that you're going to a hundred percent variable. So, But it is a change for your sales force. Could you just maybe talk about, you know, what a typical salesperson, you know, at US Foods is going to see here? Well, some people make less money, some people make more money, you know, initially. And how you mitigate any, you know, risk associated with potential turnover?

Very good questions, Ed. And let me just tell you, I have high confidence in our ability to execute this transition. As I commented, this isn't something that we just thought about last weekend. We've been working on this since the better part of this year. And importantly, just some inside thinking here, I was contemplating this change the day I showed up here because I think it's the right way to compensate our sellers. I want them to be incented to grow as fast as they possibly can and importantly, make as much money as they possibly can. And if you have the comp plan designed right, the more they make, the better it is for them and the better it is for growth and, you know, for the business and for the company. And so, obviously, we'll be thoughtful about the change management process here. We've got a very robust plan in place. I'm most excited about, obviously, you would expect I didn't announce this to our sales force on this call today. We've been talking a lot about this internally. And as I commented, people are excited about it. and eager, and I believe it's going to help us further accelerate our growth. So we'll manage it thoughtfully. We'll manage the transition thoughtfully with each individual. We're already having those conversations, and I think it means great things for the future.

Great. Thank you.

Thank you.

And our next question comes from the line of John Heinbockel with Guggenheim. Your line is open.

Hey, Dave, I wanted to start with the team-based selling change. So how many of those folks, because I think that piece is a good size number, how many of those are transitioning to this new role? Is that new role, is it customer facing in the sense that they will be actual salespeople from where they were before? And what does that do? That's relatively true. What does that do to sort of the growth rate in the Salesforce going into next year?

Yeah, I think the overwhelming majority of those folks that were in those roles have been offered seller roles, definitely customer-facing ed. They're excited about it. They see the logic behind the change, and importantly, we're retaining all of that expertise inside the company. So they're up and running. It'll have a one-time, you know, bump effect in terms of our seller headcount, but That's not the way we're thinking about it. This is a one-time change. Importantly, we're running about 5% plus or minus sales headcount additions through this year. We'll finish in that 5% to 6% range for the full year and staying consistent with our approach to low- to mid-single-digit headcount additions.

And then the follow-up is you talked about the double-digit increase in penetration accounts. you know, in terms of their, I guess, their volume. You know, where does that take, if you look at where they were on penetration before, where they are afterwards, you know, where does that take? And that obviously is a pretty good lift. You know, what's the, and I know you want to make sure that it's totally incremental, sort of what's the gating factor, right? I know you go, you increase markets, trucks, et cetera, but the gating factor on rolling that out.

Yeah, you're talking about pronto penetration, right? Yeah, yeah. Yeah, yeah. So, Just as a reminder, when we go into a new market, we go with a limited number of trucks to prove the model. And, you know, we did enough piloting that we're confident that we're going to maintain the profitability and, importantly, not cannibalize our existing broad-line business. But that's something we have to check every market, John, and that's why we go in with a relatively small number of trucks. That's why I made that comment that we will continue to drive growth through additional trucks in these markets as they make sense. You know, the double-digit uplift is exciting, but again, it's to a limited number of customers. But importantly for us, it just validates the model market by market, and it gives us the confidence to go lean in harder. You know, exiting the year at $1 billion is a significant uptick in where we hope to be, and, you know, we'll see when $1.5 billion comes along.

Thank you.

Thank you.

And our next question comes from the line of Lauren Silberman with Deutsche Bank. Your line is open. And your line is open. Please check your mute button.

Can you hear me? Can you hear me now?

Yeah, good morning, Lauren.

Okay, sorry about that. So I wanted to start with the sales comp model first. How do these changes impact the flow through, given just the more variable construct? And are you contemplating accelerating your pace of sales growth over the next few years with the shift?

What was the last part of your question? Accelerating what?

Are you contemplating accelerating the pace of the sales force growth above, you know, 4% or 5%?

Good morning, Lauren. This is Dirk. I think overall, we still continue to like that low to mid single digits increase rates, and that's where we expect to continue to be. The flow through our expectation is very similar to today. So this really wasn't intended to be an increase or decrease in compensation versus more linkage to the compensation with the growth. And therefore, as Dave pointed out earlier, as sellers have that 100% compensation, that it links it more with their growth and the opportunity for them to earn more all while accelerating growth is our expectation.

Okay. And then... It's nice to see the leverage in the P&L despite the softer top line. One of the top questions we get is your ability to hit the long-term algo if the macro backdrop remains challenging. So if current trends persist into 26, what's your confidence in being able to hit that algo?

Well, I think I reaffirmed my confidence several times in my prepared remarks. I couldn't be more confident. And I would just point out to those that are concerned, we've been doing it for about 10 quarters now in a very soft macro backdrop that continues to remain sluggish. We have a tremendous amount of self-help. We've got a very clear strategy, Lauren, and our team is 100% focused on execution. Confidence is high.

Thank you, guys.

Thank you.

And our next question comes from the line of Kelly Bania with BMO Capital Markets. Your line is open.

Hi, good morning. Thanks for taking our questions. I wanted to ask also about the change in the commission structure. It's a pretty significant change. And I guess investors historically can be pretty cautious about how disruptive that can be on a near-term basis. So can you just maybe talk a little bit more about the change management that you're planning to support this, the kind of turnover that you do expect if you expect some, and what kind of lift can this drive based in what you've seen from maybe testing this in terms of the productivity of that typical sales rep?

Well, I'll take the last part first, Kelly. First of all, we wouldn't be doing it if we didn't have high confidence that it was going to accelerate growth. Because you've heard me say many times, when you change sales compensation, you have to be really thoughtful about how you do it and what potential unintended consequences you could have. And that's why we've been thinking about this for a while. We've been working on it for quite some time. And the change management process is quite robust. I do not expect an increase in our turnover. We are handling this seller by seller, giving them good visibility to how they're currently compensated and what the new change will make. Any required behavior changes, you know, we're going to give them a long runway and we're going to be thoughtful about how we bring them into that 100% commission plan. The goal here is to ease people into this and make sure they have a chance to perform and understand those expectations. All that's being worked on has been worked on for quite some time already. and will be thoughtful about how we roll this out in 2026. So I've got a high degree of confidence, not only in the change having the right output that we intend, but also our ability to manage this quite well with our sales team. And as I said, and I'm not making it up, they're excited.

Okay, that's helpful. Just on the strategic vendor management, it sounds like that's coming in a little bit better than planned, which is There's been strong progress on that initiative already, but you've mentioned kind of reinvesting some of that. Can you just talk about that decision, the magnitude of that, and where we should see the benefits of those reinvestments?

I'll start and then just have Dirk to pick it up. You know, I would liken that work and that comment around reinvesting to the same way we think about productivity gains. You know, great companies find ways to drive productivity and efficiency, and they take a portion of that and reinvest it back into growth for the company, whether that's new people, new capabilities, investment in technology, investment in competitiveness, whatever you need to do to make sure that you can compete well. We've got to make our own way. There's nothing free here. So we continue to invest in growth and find ways to get more efficient and drive better outcomes and win-win ways. Dirk, what would you add?

The thing I would add is this is not new. We've been talking about this for a number of quarters where it's as we drive this value, then it does allow us to be thoughtful in how we reinvest in that growth with different customers.

Thank you.

And our next question comes from the line of Jeffrey Bernstein with Barclays. Your line is open.

Great. Thank you very much. First question is, Dave, I know you mentioned no update on the performance food discussions. Totally appreciate that. Just wondering, as you run your business, business as usual, I'm just wondering whether you're seeing any change in how people look at your business, whether customer behavior, perhaps holding off on giving new business until the process settles, or perhaps hesitation by salespeople to join, not knowing the future. I could see where there would be some uncertainty. I presume, therefore, a rapid resolution would be the best scenario, but just wondering if there's been any implications on your business as this process unfolds? And then I had one follow up.

Thanks, Jeff, for the question. And really, there hasn't been any impact. We haven't seen that at the customer level. We certainly haven't seen it internally. You know, as we said, going into this, we would maintain our focus on day-to-day execution. Hopefully, our results support that. And importantly, we haven't had any challenges attracting new sales talent. You know, I talked about being in that 5% to 6% range for the year. and we've been at this for a while now, so we're still having robust incoming new sales classes, and people are excited to be here.

Understood. And then my follow-up is just on the restaurant industry. We've heard from many restaurants over the past week, and they all talk about a slowing trend in October, which you haven't seen, which I'm curious to know why you think that is, but They've talked specifically about the younger age cohort and the lower income and perhaps Hispanic. Just wondering whether you see any evidence on any of those specific groups based on your customer demand. And then just write why you perhaps haven't seen any change in trajectory in October if a lot of restaurants are talking about such. Thank you.

Yeah, thanks. And don't want to misrepresent anything. I think I used the word sluggish, you know, more recently. I think it's related to the government shutdown and some of the uncertainty. You know, we're operating in an environment here for several years now where consumer confidence has been a challenge. The knock-on effect from the government shutdown certainly impacts consumer confidence, and I think that's what we're saying and seeing, you know, broadly. Certain markets, as I mentioned earlier, in a response, you know, up and down the East Coast are more challenged with, you know, the more government headcount and those challenges. But again, I just keep coming back to our execution is our execution. We have significant ability to take market share, and that's where our team is focused. And when the shutdown gets resolved, when the consumer confidence gets back to where it needs to be, we're going to be extremely well positioned because of the work our team's done over the past two, three years.

Got it, but no change in different cohorts that you've noticed or different segments of the industry may be seeing a change in trend?

Well, I think we pointed to the low-income consumer being pressured for a while. That's not a new thought. I don't think anything has changed there. Some of the ethnic challenges, I think that ebbs and flows. And for us, it's really a market-by-market impact. We've seen some of that in some markets, not so much in others. But I would just, again, just point back to consumer confidence being challenged. Low-end consumers have been challenged. No real change in that. And then you overlay the shutdown and all that uncertainty. And, yeah, it's a little choppy out there. Thank you. Thank you.

And our next question comes from the line of Alex Sliggle with Jefferies. Your line is open.

Thanks. Good morning. Great. The triple comps, I guess just stepping back, okay, there are some portions. Hey, Alex, you're cutting out.

We're having trouble hearing you, Alex. You're cutting out significantly. Can you hear me now? For the moment, yeah.

All right. So on the role realignment, thank you. more broadly around decentralizing portions of your business.

I'm sorry, Alex. We'll have to catch you offline. We just can't hear you. I'm sorry. We'll catch you later. Thanks.

And our next question comes from the line of Jacob Aiken-Phillips with Mellius Research. Your line is open.

Hi. Good morning, everyone. So I wanted to ask a follow-up on the sales compensation change. You said it's slated for 2026 rollout, but also that you're working with all the salespeople. I'm just curious, should we expect it to be more phased throughout 2026, or is there a date where a large percentage of the sales force will change over? I understand you're trying to minimize turnover, but I would expect at least some level, and I'm trying to see if that's more phased or if there's a point in time.

Yeah, the phasing is more around the piloting work we're doing in the fourth quarter that I refer to. We'll do some transition and we'll give visibility into, you know, both methods of payment for some period of time. And then, you know, we'll pick a date certain and make the move.

All right, got it. And then I guess more broadly, you highlighted like strong progress across vendor management, inventory loss reduction, the car, private label, a bunch of stuff. And A lot of these are transitioned from, like, you've been building the capabilities to running them now, but which of those have the most incremental runway in the next, like. 1 to 2 years, and which of them are most insulated from the current restaurant traffic environment.

Morning, this is Derek. I'd say really. All of them, almost all of them are insulated today. They drive. I mean, they're really part of the self help focus and story that we have here. The things that we can control. And all of them continue to have runway ahead of them. They contribute at different levels. So strategic vendor management is one of our larger initiatives. So that one we expect to continue to generate incremental value. But each of those that you cited will continue to drive value. That's why that portfolio approach we have to things that we're doing to drive, whether it's gross profit gains, market share gains, OPEX productivity, It's there's not two or three things that are driving it. There's a managed portfolio. And as different aspects of that come to maturity, then we have other things that are ramping up. And that's what really gives us that confidence that Dave alluded to again yet today of our ability to continue to drive earnings growth and achieve our long range plan algorithm that we've outlined. Thank you.

And our next question comes from the line of Brian Harbor with Morgan Stanley. Your line is open.

Thanks. Morning, guys. Hey, Dirk, what's roughly the sort of the M&A contribution as we think about the coming quarter and maybe also just, you know, how are you thinking about kind of inflation and mix?

M&A has been in that 30, 40 basis points. I would expect it probably stays around on that level. You have one that rolls off as you get a little later in the quarter, but then the other smaller one that we announced today will close at some point in the quarter. And so I think it'll stay around that 30, 40 basis points of impact. Inflation, we saw it pretty stable. It ticked up a little bit in the quarter, right at three. Then all the categories that you've heard others talk about, whether beef and other COP categories, But other than that, grocery stays pretty stable, so commodities are moving around, but I think it's still in that healthy spot of 2% to 3%, and that's where I would expect that it likely continues to stay.

Okay, got it. Thanks. Thanks. The comment about kind of AI was interesting, just how that's driving conversion. What are some other uses of that that you see in the business?

We're really using it, as Dave mentioned in his comments, pretty broad-based. And it informs that. It informs some of our online recommendations to customers of either products that they haven't bought or others have, various aspects of the digital marketing. It also informs a lot of the models behind our routing, our letting customers know where their truck is, when it's supposed to arrive. And then the thing we've talked a lot about is the order guide for our sellers where they can basically pull together the proposal for a customer, for a local customer, in 15 or 20 minutes for something that used to take them two or three hours. And so we're applying it broadly for customers. sales growth and productivity, but a big focus on things that have some impact now as opposed to, you know, what's just going to be neat and cool or, you know, deliver value in five to seven years. So our team, it's the business team and the digital team and the AI development team that are all working together to really prioritize and bring these things to market and advance those capabilities. Thanks.

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

Good morning. Thanks for taking the questions. So I want to start with a follow-up on the Chautauquas. Hey, guys. I want to start off with a follow-up on the Chautauquas acquisition. Just how does its mix of business compare to some of the other recent purchases you made, like Jakes, IWC, and Saladinos? And then more broadly, how are you thinking about your approach and pacing to more traditional bolt-on M&A? essentially while you're undergoing the clean room exercise.

Well, with Shatakis, you know, it fits exactly our model. It's got a pretty even mix of casino business and independent restaurants. And if you think about our footprint in Vegas, that's exactly where we're focused. So we love it from that standpoint. And I just emanate strategy in general, Mark, as you've heard us say, is really a market-by-market play around tuck-in acquisitions really to improve our our local market density, take miles out of our routing, and we lean heavily on, you know, our three core target customer types, but specifically independent restaurants. And this one fits that exactly. Our pipeline's strong. You know, as we've said, you never can control when one of these things comes out, but we continue to have robust conversations in our broad line business and really focused on the independent space.

Okay, great. And then it sounds like some continued good demand in healthcare and hospitality. You called out some nice anticipated wins there. Would you consider the pipeline of business to be deviating much from your initial expectations on that front? And then I guess within hospitality, how is growth progressing between your lodging and non-lodging segments?

Sure. We're quite pleased with the pipeline there. Our team continues to do a quite nice job of maintaining a strong pipeline. And I think that's really more of a testament to the value proposition that we can bring to customers. And so I'm confident that we'll continue to drive healthy levels of growth in both of those customer types. I think overall from a hospitality perspective, lodging has actually been pretty solid for us in the last few months. I know there's been some challenges in occupancy and whether it's Vegas or some other places, So that's still kind of hit or miss across the country, whether it be fewer international travelers, et cetera. But it's holding up well. But at the same time, a big part of the growth there for us continues to be this net new account business that the team has converted and will continue to convert going forward.

Great. Thanks so much. Good luck, guys.

Thank you.

And our next question comes from the line of Jake Bartlett with Truist Securities. Your line is open.

Great. Thanks for taking the question. Mine was about the market share gains in independents. And all three of the large players are accelerating case growth of independents. It seems like there's an acceleration of market share gains by the larger players in general. I guess I'm wondering why you think that's happening. Is that a trend or are there dynamics in the marketplace where that is particularly suited for market share gains from the larger players and whether you'd expect that to continue or even accelerate from here?

I don't think I would point to... You know, anything different in terms of the market dynamics, Jake, around that? I mean, you know, you go back even to our investor day, the big three have consolidated this industry and taken share for a long time. Broadly, it ebbs and flows. Importantly for us, we've got 18 consecutive quarters in independent restaurants. It's nothing new for us. You know, we've talked in the past about how we use the Shekinah data to really target by zip code where the opportunities are. Our sales forces really embrace that. We make sure we have the right assortment in place before we target a certain type of customer, uh, within those markets. And so it's, you know, it's, it's our process continuing to mature is what I'd really point to, uh, that's driving our success. Nothing, nothing really new. And I don't really see any changes in the market dynamic there.

Great. And then, you know, I'm sorry if this was, um, answered before, if it was, I missed it, but, um, independence, um, you know, case growth or, or actually just traffic growth, um, For the chains that we've been following, October has been pretty pressured, I think, broadly. But you're talking about an acceleration for your business, one of your competitors. You mentioned the same. And so is independent traffic doing much better than chain? Is there kind of an outperformance there that's been accelerating in recent months, you think?

Jake, good morning. It's Dirk. So we didn't talk about acceleration in October. It's really that sort of strength relative to the quarter that we saw in September, that carrying through October. I think Dave made the comment there that in these last few weeks, choppy, I think is the word he used, which is a good word. I've heard a number of others out there use it. Just with a lot of things happening together, it's harder to get a good solid read. But in the meantime, our case growth, as you said, held up solid through October, and our team's going to continue to focus on gaining share and driving top-line growth.

Great.

Thank you.

And our next question comes from the line of Peter Salo with BTIG. Your line is open.

Great. Thanks for taking the question. I wanted to ask... On the change in the seller's compensation, do you anticipate that will drive the private label penetration higher? And can you just remind us again the profitability on private label versus branded and how you guys plan to proceed there with that change in seller's compensation?

Yeah, I think private label in general is roughly twice as profitable. for the company and for our sellers as manufacturers, brands. And importantly, as I commented, we're in setting for growth with independents, with our private label and with Pronto and our compensation plan. So we do expect an uplift in that. And as you've heard me say many times, I don't see any near-term ceiling to our private label brand penetration opportunity. Our sellers are embracing that aggressively. I think that's why you've seen our success over the last 18 to 24 months. Importantly, our customers are embracing it because it solves problems for them. It helps them deal with inflation in a big way. And these are at their heart. These are great quality products that our customers are embracing. So lots more to come. We're excited about it. And certainly we're incenting our sellers in the right way to lean into our private label products.

Great. And I just wanted to follow up on the comments on October. I know Last October, there were some storms, so maybe a slightly easier compare. But then this year, we've got the government shutdown. Any more details you guys can provide on the October trend this year versus last?

Not really, Peter. I just point to my comments earlier. You know, we roughly finished at the same growth rate we did in September, nominally that 4%. And, you know, a little stronger in the first half, a little choppier in the back half. really driven by the government shutdown. But again, we've got good momentum and we're focused on gaining share.

Thank you.

Thank you.

And our next question comes from the line of Karen Holthaus with Citi. Your line is open.

Hi. Thanks for taking the questions. Kind of continuing on the theme of the government shutdown, Carolyn Noll Sorg- Thinking about more on the hospitality side of the business would, would we want to think about, you know, travel disruptions and whatnot. Ultimately, maybe you're filtering down and hitting that a little bit in the fourth quarter.

Kieran Furlong, M.D.: : More Karen is I think this is the one where we'll watch like everybody else what the implications may be. I think, you know, I don't want to diminish the impact of the shutdown, especially on the individuals that impacted. But I think, you know, when you think of for the industry, you know, our expectation would be this gets addressed pretty quickly. And so when we think about what our business looks like, you know, going beyond this period of time, you know, can we continue to feel very good about our ability to gain share and drive growth? And, you know, we'll manage through this period as we face some of the same macro challenges as most other businesses.

And then one other one on the chain side of the business. I know there's a pretty big exit in 2Q and then more recently spoke to some business coming on board. How should we think of the sort of net on board, off board evolving through the next couple of quarters for that piece of the business?

most of the main business came on second quarter and through the third quarter. So we expect to be, you know, improved here in the fourth quarter, but then it really is going to be dictated more by just the overall traffic within our concepts. And, you know, as you probably know, black box is a good proxy, but really it comes down to more of a chain by chain performance because it's, it's quite differentiated across them. So, You know, that's an area where we'll continue to optimize the business. But overall, the onboardings that we've talked about previously are playing out as we had expected.

Okay, great. Thank you. Thanks.

And as a reminder, it is star one if you would like to ask a question. And our next question comes from the line of John Ivanko with JP Morgan. Your line is open.

Hi, thank you. The question is about independent restaurants and specifically on the credit side, which obviously broadliners and food service distributors are somewhat in the business of issuing credit, even if extremely short term, to your customers. So the question was around the benefit that your sales force being close to customers and maybe even AI to some extent giving you some data that putting you close to customers that are maybe helping you make more informed credit decisions. In some cases, people deserve a little bit more time or more help, especially to open new restaurants. And in other cases, it actually might make sense to pull back credit and not extend some terms. So it's not something I don't think we've talked about in some time, but just with obviously a lot of disruption just going on in various pockets of economies across the country, how you kind of feel about

know the credit side of your business and how it could potentially be an opportunity for you thank you morning john uh i feel good about where our team is from a credit perspective you know we really try to balance the use of you know what the data and the the tools teach us tell us but also as you pointed out those sellers and those local teams being close to the customer that communication back and forth between them and our credit teams is is a regular occurrence And to your point, there's not one answer on everything. Sometimes the answer is that you need more time. Other times you have to have the harder decisions. And other times, as much as you can do all those things, you still get caught with some of that. So our team is really, I think, doing a pretty good job of managing through it. It has been because back to Dave's point on that consumer confidence and some of the challenges out there they're not new this quarter they've spent different uh versions the last couple of years and our team has uh has managed pretty effectively through that and i'm pretty confident that they can going forward but we're definitely not taking our eye off the ball on it thank you and our final question comes from the line of danilo gargiulio with bernstein your line is open great thank you very much for taking the question um

I was wondering if you can provide maybe more color on the progress on the semi-automated warehouses, and specifically, if you're starting shipping out of your semi-automated facility in Aurora, how has your GP per case increased? And stepping back, what is your long-term aspiration in terms of automation?

good morning so you know it's still pretty early and since we're transitioning through there and you know as you can imagine with any transition uh you work through sort of things that work well and some learnings and our team's doing that but what we are making continue to make progress so at this point i'm going to hold off on any commentary on impacts on whether it be uh gross profits productivity etc but the thing that we remain quite encouraged by is we're learning from it and you know we expect that automation and warehouses we'll play some meaningful part over time. It's just, it's almost inevitable and it's just a matter of what do we learn out of it and how do we continue to find the best ways to leverage it across our network. So more to come.

Okay, thank you. And then on the Pronto investment, I was wondering if you can make some or can give some incremental color on your statement of the largest investment in Pronto. So is it purely in terms of trucks and in terms of markets that you're entering, or are you contemplating some incremental support to increase the amount of penetration? So an incremental color on how Pronto could be delivering some step change in penetrating more independent accounts. Thank you.

Yeah, I think with the work that we've done over the past several years, we've got great confidence in both Pronto Legacy, Pronto Penetration. We've got a lot of work going on to support that business today. So I don't think the investments are more around that. It's more trucks and people to drive those trucks. And with the confidence that we've got, you'll see us leaning in pretty hard in that in 2026. The model's proven. It's working. Our salespeople love it. It's serving our customers in a way that we had a gap. And I think it's proven out by the growth rate. So we're bullish about Pronto and we're going to continue to invest in it.

And it really just, it fits so well with our balanced focus of earnings growth and improvement and return on invested capital. And, you know, as you've seen probably in our trends, we've made significant improvements in that and progress over recent years. And, you know, many of the decisions we make apply with that lens as well. And this is pretty capital light and it is a great service for our customers.

Fantastic. Thank you.

And that concludes our question and answer session. I will now turn the conference back over to Mr. Dave Flitman for closing remarks.

Thanks, Abby, and thanks, everyone, for joining us today. Our team remains focused. We're executing very well, and my confidence in our future has never been brighter. Have a great day. Appreciate you joining us. Thanks.

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.