US Foods Holding Corp.

Hello, my name is Karen, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the U.S. Foods Holding Corp. Q126 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you'd like to withdraw your question, just press star once again. Thank you. I'd like to turn the call over to Mike Neese, Senior VP of Investor Relations. Please go ahead.

Thank you, Karen. Good morning, everyone, and welcome to U.S. Foods' first quarter fiscal 2026 earnings call. On today's call, we have Dave Flibman, our CEO, and Dirk Lacazio, 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 and today's presentation can be found on the Investor Relations page of our website at ir.usfoods.com. During today's call, while that's otherwise needed, we're comparing our first quarter fiscal year 2026 results to the same period in fiscal year 2025. 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. Excuse me. 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 presentation slides posted on our website. We are not providing reconciliations to forward-looking non-GAAP financial measures. Thank you. I'll turn the call over to Dave.

Thanks, Mike. Good morning, everyone, and thank you for joining us. Before we begin, I want to thank our dedicated team of 30,000 associates for their unwavering commitment to serving our customers, which was clearly evident in the first quarter. Through their hard work, despite the significant weather-related challenges and increased macro uncertainty related to the Iranian war, we again accelerated our case growth and made further progress on our self-help initiatives. Perhaps more than any other quarter during my tenure, this performance reflects our ability to win in any environment. I'll move now to highlights from the first quarter, followed by an overview of our performance and the progress we've made in executing our strategy, all of which positions us for further growth in 2026. DIRP will then review our first quarter financial results in more detail and provide an update to our 2026 guidance. Starting on slide three, during the first quarter, we delivered strong results amid headwinds from severe weather, the conflict in the Middle East, and rising fuel costs, with consumer sentiment declining to an all-time low in March, all of which impacted our industry. Importantly, we accelerated year-over-year and sequential organic independent restaurant case growth by more than 300 basis points and 70 basis points, respectively. We posted 15% adjusted diluted EPS growth despite a deteriorating macro environment that persisted well beyond early February when we provided our first quarter guidance. We delivered strong case growth with our target customer types. The first quarter marks our 20th consecutive quarter of market share gains with independent restaurants and 22nd consecutive quarter with healthcare. We achieved our strongest organic independent case growth in more than two years at 4.4%. This achievement reflects the continued momentum we are building by winning new business and bringing increased value to our customers. Case growth started out strong before storms hit a significant portion of the country beginning in late January and persisted through much of the quarter. Despite these challenges, we again posted profitable growth by focusing on what we can control. And we grew adjusted gross profit 50 basis points faster than adjusted operating expenses increased adjusted EBITDA 6% and delivered 15% adjusted EPS growth. The winter storms and higher fuel costs impacted our P&L with nearly twice as many distribution center closure days this year compared to the first quarter of last year. Adjusting for these external impacts, we believe our adjusted EBITDA growth would have been approximately 10%. Importantly, our April independent case growth remained strong and was in line with our first quarter. We are focused on executing our strategy with discipline and consistency, underscoring the strength of our business model, the significant momentum we've built over the past several years, and our ability to win in any environment. Let's now take a look at our progress within each of our strategic pillars. Starting with slide four, our first pillar is culture. Keeping our people safe is paramount. During the first quarter, we improved injury and accident rates by 12% compared to prior year and 45% over the past three years. While we're making steady progress, our ultimate goal is zero injuries. As part of our commitment to safety, we continue to replace our end-ride powered industrial equipment with safer center-ride models to greatly reduce the risk of one of our most serious injury types. We've completed 80% of that rollout, and we remain on track to finish by year end. Beyond improving safety, we continue to invest in the business, focusing on developing our people and strengthening our capabilities. During the first quarter, we brought together more than 500 leaders for our Sales Leadership Academy, a multi-day workshop focused on strengthening critical leadership skills, building high-performing sales teams, and preparing them for the rollout of our new seller compensation plan. Feedback was very positive and reinforced the value of this continued investment in the development of our associates. Moving to slide five, our service pool. To enhance our customer experience and the value we provide, we continue to advance our digital capabilities and drive operational excellence across the business. We've embedded new AI capabilities into our Moxie platform that empowers our customers and helps them run their business more efficiently. We recently launched MenuIQ, an AI-powered tool that helps restaurant operators better manage food costs and gives them real-time visibility into menu profitability. MenuIQ is built the way operators work, bringing together essential capabilities that make menu management intuitive and actionable. Operators can upload recipes and automatically calculate food costs, monitor which menu items drive margins, and identify underperforming dishes. A chef at one of our independent restaurant customers shared their experience. He said, menu IQ is easy to use and super fast. I can cost out new menu items and try ingredient swaps in a few minutes on my phone, something that used to take hours juggling spreadsheets. Customer adoption has been strong. In just two months since launch, 15% of our independent customers are using menu IQ, which is double our early expectations. AI remains an important opportunity for us, and we continue to expand the use of our proprietary and third-party tools. We are building momentum as we apply these capabilities to enhance the customer experience while driving productivity and more effective execution across the business. We're also thrilled to introduce Signature, our new differentiated solution for hospitality customers, which provides similar value that our highly successful Vitals program does for our healthcare customers. Importantly, Signature goes deeper than just our customer's ordering relationship with us. It's a comprehensive suite of industry-leading products, smart technology and support designed to help our hospitality customers solve some of their biggest challenges, managing labor and staffing, identifying cost-savings opportunities, and improving menu profitability for high-volume events such as catering and banquets. In addition to providing the right tools and resources to help our customers make it, we're building a best-in-class supply chain to ensure customers get the products they ordered on time and in full. A key driver of service-level improvement is our focus on operations quality composite, or OPSQC, which measures how well we deliver accurate, error-free orders to customers, enhancing the quality of service that our customers experience. We made strong progress with OpsQC in the first quarter, improving by 21% and building upon the 20% improvement we achieved last year. In fact, Q1 represented our best performance since the first quarter of 2019. In summary, we continue to enhance our customer value proposition to help our customers make it while executing our self-help initiatives to drive sustainable improvement in our operations and generate annual productivity gains. Now, let's turn to our growth pillar on slide six. Pronto, our small truck delivery service, is a powerful competitive differentiator and strong contributor to our growth strategy. Through Pronto, we offer our customers more convenience and flexibility, including smaller order sizes, more frequent deliveries, and fill-in orders, which enables us to more effectively compete with local and specialty distributors. We continue to expand the reach of Pronto and have recently gone live on our 47th market, And Pronto Next Day, which extends the Pronto service to existing independent customers, is now live in 26 markets with plans to add approximately 10 more this year. The overall Pronto program is growing at strong double-digit rates and remains on track to generate $1.5 billion in sales in 2027, demonstrating this model's success and Pronto's role as a key long-term growth driver. Another expected driver of our long-term growth is our new seller compensation plan, which will go live across the company next month. As a reminder, our local sales force will transition from the current 50-50 fixed and variable compensation plan today to a fully variable plan. We are committed to ensuring a smooth transition for our sellers and our business. As we have previously discussed, it may take two to three years for the majority of our local sales force to fully transition to 100% variable compensation. Doing this well, rather than adhering to a strict timeline, is the right approach to fully support our sellers through this important change that we believe will unlock future growth. The new compensation structure will create better alignment to our business strategy, enhance the earning potential of our sellers, and fuel future case growth. I am pleased with the progress we're making towards our launch and our sellers and sales leaders remain excited about the opportunity ahead. Let's now move to our profit pillar on slide seven. Our team effectively managed this challenging quarter through the disciplined execution of our self-help initiatives, resulting in consistent profitable growth and margin expansion. Adjusted gross profit was $1.7 billion, up 4.4% from the prior year, and was driven by volume growth and improved cost of goods sold. We continue to make progress with our strategic vendor management work aimed at generating additional cost of goods savings. As we realize these benefits, we are reinvesting a portion of those savings to help accelerate growth. We continue to expect to deliver at least $300 million in cost of goods savings over our three-year long-range plan ending in 2027, which is up from our original $260 million commitment. We also remain focused on growing our private label brands. Our penetration remains strong and stood at 54% with our core independent restaurant customers. Private label remains a meaningful growth opportunity as it benefits both our customers and U.S. foods by offering more cost-effective products and supporting stronger margins. In addition to improving gross profit, we're offsetting operating expense inflation by accelerating productivity, simplifying administrative processes and capturing savings on indirect spend procurement. In the first quarter, we delivered a 3% improvement in year-over-year warehouse and selector productivity, driven in part through our U.S. Foods Market Operating System, or UMOS for short. UMOS is our supply chain process standardization and continuous improvement platform to operate more effectively. It is a key enabler of our annual productivity improvement goal of 3% to 5%. UMass is now live in 70 markets, and we expect to finish deployment by the middle of this year. Lastly, indirect spend remains an important lever in our expense management efforts, and we continue to generate strong results. This year, we expect to deliver more than $75 million in savings, up from $45 million last year. And we remain on track for more than $100 million of savings in 2027. Before I hand it over to Dirk, I'll take a moment to acknowledge our exceptional associates who consistently deliver excellence. May holds special significance for us as it marks the 10th anniversary of the US Foods IPO, and it is also National Military Appreciation Month. On May 26, 2016, US Foods debuted on the New York Stock Exchange with an initial public offering at $23 per share. We've come a long way over the last 10 years, transforming into the strong and resilient company we are today. I extend my sincere gratitude to our 30,000 associates for their dedication and their hard work. I'll also highlight an associate who achieved an extraordinary accomplishment. Jayden Falkenbang, a Knight Selector in our Sacramento Distribution Center, has taken the every case matters mentality to the next level, selecting more than 1 million cases without a single error since June 2023. Each and every case he selects reflects his commitment to accuracy and his pride in ensuring our customers receive exactly what they order every time. Thank you, Jayden, for your commitment to delivering excellence to our customers. With this being National Military Appreciation Month, I am incredibly grateful for our 1,500 veteran associates and the unique expertise they bring to our company. At U.S. Foods, we highly value the skills gained through military experience and I am proud that we are on track with our mission 2030 commitment to hire 3,000 military veterans by the end of the decade. As Memorial Day soon approaches, we remember all the courageous men and women who have made the ultimate sacrifice to defend our freedom. To all our active military and veteran associates, customers, partners, and investors, thank you for your unwavering dedication and steadfast commitment to our great nation. Now let me turn the call over to Dirk to discuss our first quarter results and our 2026 guidance.

Thank you, Dave, and good morning, everyone. Our first quarter performance reflects our continued focus on controlling the controllables, driving profitable volume growth, and delivering on our self-help initiatives. We again grew adjusted EBITDA, expanded margins, and grew adjusted diluted EPS meaningfully faster than adjusted EBITDA. We also generated significant operating cash flow and remained disciplined with our capital allocation priorities, investing in the business to support growth and repurchasing shares while maintaining a strong balance sheet. Starting on slide nine in our financial results, first quarter net sales increased 2.8% to $9.6 billion, driven by total case volume growth of 1.4% and food cost inflation and mix of 1.4%. Excluding the freshway divestiture, which we completed in the first quarter of last year, public case growth was 1.6%. Our independent restaurant volume accelerated again. It grew 4.6%, including 20 basis points from acquisitions. Healthcare grew 3.7%, and hospitality grew 5%. Our chain restaurant volume was down 2.3%, largely in line with industry foot traffic trends, as reported by BlackFox. Turning to our financial results, first quarter adjusted EBITDA grew 6.2% to $413 million, driven by volume growth with our target customer types and ongoing progress on our self-help initiatives to improve gross profit and enhance operational efficiency. We estimate that the combined net impact from weather and higher fuel costs reduced our adjusted EBITDA growth by approximately 4 percentage points. Finally, adjusted diluted EPS increased by 14.7% to $0.78. We again grew adjusted EPS meaningfully faster than adjusted EBITDA and expect this trend to continue, supported by earnings growth and deploying our strong cash flow toward share repurchases. Turning to slide 10. We drove operating leverage gains as we again grew gross profit per case faster than adjusted operating expenses per case, resulting in healthy adjusted EBITDA per case growth. Adjusted gross profit per case maintained its strong and steady growth trajectory and increased 23 cents or 2.9% compared to the prior year. This was primarily driven by our self-help initiatives, including our cost of goods sold work. Adjusted operating expenses per case increased 14 cents to 2.3%, with 4 cents related to incremental expenses from weather and higher fuel. We remain focused on offsetting a portion of operating cost inflation by driving efficiencies through supply chain productivity gains, indirect spend procurement savings, and administrative process streamlining. First quarter adjusted EBITDA per case increased by 8 cents to $1.98 as we grew adjusted gross profit per case 60 basis points faster than adjusted OPEX per case. Moving to slide 11, we continue to generate strong cash flow and deploy capital consistent with our capital allocation priorities, namely funding strong capital investment to maintain our business, support growth, and drive attractive returns, Returning capital to shareholders for share repurchases. Maintaining a strong balance sheet with net leverage remaining well within our long-term target range. And pursuing a creative tuck in M&A. Operating cash flow in the first quarter was $294 million. Cash flow is below prior year due to less working capital benefit in the current year. Excluding the working capital impact, operating cash flow is above prior year. We expect our full-year operating cash flow to grow this year versus 2025. During the first quarter, we invested $98 million in cash capex to support our business and enable organic growth, enhance our capacity, and further strengthen our technology leadership. We also repurchased 1.4 million shares for $125 million and have $1 billion remaining on our share repurchase authorizations. Finally, we ended the quarter at 2.6 times net leverage. Our debt structure is strong, and our leverage is the lowest among our large public peers. In addition, we have no long-term debt maturities until 2028. Now, turning to guidance on slide 12. We are reaffirming our 2026 guidance based on the strength of our business and outlook for the balance of the year. We continue to expect adjusted EBITDA growth to be in the range of 9% to 13% and adjusted diluted EPS growth to be between 18% and 24%, which includes the impact of a 53rd week. Given the macro uncertainty, OPEX timing shifts, and higher fuel costs, which we believe will remain elevated in the near term, we expect second quarter adjusted EBITDA growth will be mid to upper single digits. If fuel remains at these elevated levels and macro uncertainty persists into the second half of the year, we believe we will be at the lower end of our four-year guidance range. Absent those pressures, we expect growth to be in line with our long-term algorithm. As a reminder, and specific to fuel, we typically recover 30% to 40% of fuel cost increases through surcharges, although this recovery process tends to lag fuel price changes by about a month. Additionally, we have approximately one-third of our expected 2026 fuel gallons locked into fixed price contracts at lower than current market prices. Fuel costs do impact our business and industry. However, I am confident we can effectively manage through this likely transitory period of higher costs with our self-help initiatives. We are executing our plan. We are accelerating independent case volume, driving profitable growth, and prudently allocating capital to drive shareholder returns. I remain encouraged by our first quarter progress and confident in our ability to deliver results within our guidance range this year while continuing to position the business for double-digit EPS growth over time and advance our long-range plan. Now let me turn the call back to Dave. Thanks, Dirk.

As we look ahead, I remain highly confident in our ability to deliver our long-term growth algorithm. Even in a quarter shaped by external headwinds, We accelerated independent case growth, continued to gain share with our target customer types, expanded EBITDA margin, and delivered double-digit adjusted EPS growth. This performance speaks to the strength and resiliency of our team and our business model, the quality of our execution, and the value we continue to bring to our customers. We operate in a large, fragmented, and resilient industry, and we remain focused on the most attractive and profitable customer types within it. independent restaurants, healthcare, and hospitality. We will continue to run our proven playbook, investing in the business to improve our customers' experience and accelerate growth, driving productivity and operational excellence, and deploying capital with discipline. And I am confident that we will continue to win in the marketplace and drive shareholder value for many years to come. With that, Karen, please open up the line for questions.

At this time, I'd like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jeff Bernstein of Barclays. Please go ahead.

Great. Good morning. Thanks. This is product on for Jeff. Dave Hook. question about the elevated gas prices. You talked about how you expect it to potentially impact your profitability, but I just wanted to ask about how you're thinking about it from the top line perspective. Perhaps restaurant customers may pull back on orders as their foot traffic maybe declines further. Just anything you can help us understand what's going on there.

Yeah, well, thanks for the question. And please pass along our best to Jeff on his pending retirement. It's been a pleasure working with him. Twenty-five years is a long time in any industry, and we appreciate his dedication and support here over that long period of time. Thank you. Yeah, I think the headwinds related to fuel are just another, you know, pressure point on the consumer. And as we mentioned, you know, consumer sentiment dipped in March to record lows. But really, that's nothing new for this industry, and that's why I finished my comments with the resiliency. You know, people want to go out and have a good time and enjoy their families and have a meal out every once in a while. I think that speaks to the resiliency of the industry. You know, I point back to the Great Recession where volumes were down mid-single digits. Love to hear, you know, see the tailwinds come back. That will happen. But again, we're two and a half years into a declining foot traffic environment. The macro uncertainty right now is just another pressure point. I just point you back to our results here. Even given the macro and the weather, we delivered very strong results, expanded margins, accelerated growth importantly across our three targeted customer types. Given all those headwinds, I feel really good about our ability to control the outcomes here going forward, just as I always have. And as I said in my opening, I think this quarter speaks to that resiliency in our business model and the commitment we've got to deliver in any environment. So we're feeling good about our momentum. Love to have foot traffic bounce back and a stronger macro. It's going to happen, but we're not concerned about the timing of it.

Got it. I appreciate that color. And, Dirk, just a quick one on the inflation outlook. Obviously, moderation in the first quarter to 1% easing from the fourth quarter. Just how are you guys thinking about the cadence of the rest of the year? Are there any particular drivers that we should be aware of? that could, you know, change things materially going forward?

Good morning. I think our outlook for the year of the point and a half between inflation and mixed is still our best estimate. We know that, as you pointed out, things moderated as they ended last year and then further into the first quarter, that the movement around from quarter to quarter tends to still be primarily protein and commodity related. The underlying grocery is pretty stable. So that is... Not really that change from what we were looking at a quarter ago.

Appreciate that, Clara. Thanks, guys. Thanks.

Your next question comes from the line of Jeff Bernstein of Barclays. Please go ahead.

It would be Ed Shelly, please.

Go ahead, Ed. Ed, are you out there? Ed Kelly?

Can you guys hear me? Yeah, we can hear you, Ed. Okay, great. Thanks. Could we just first maybe dig in on, you know, the guidance a little bit more? You know, as you think about, I guess, Q2, I'm just curious as to, you know, how we're thinking about, you know, the headwinds, like some of the headwinds persisting around, you know, the way that you got at the second quarter, specifically, I guess, related to, you know, to fuel. And then if you think about, you know, the full year and the dynamics around, you know, the full year around what could get you to the low end, what could get you to the high end, could you maybe just speak a little bit more about, you know, what that means from a traffic standpoint, what that means from a fuel standpoint, just additional color there, thanks.

Sure. Good morning, Ed, Dirk. For the second quarter, it really is, we assume the fuel remains elevated. And as we saw, it really spiked earlier in April, and then it's moderated a bit, but still elevated. So, we assume it stays around where it's at. Now, if we see it spike further, that would obviously put an additional headwind on the business for the quarter. but we don't assume it gets significantly better for the quarter. As we go through the year, that's why I gave the comments about how we think about the range. If we see fuel moderate back to where it was more quickly and we see the macro strengthen a bit, that would be something that propels us to the higher end. And if fuel remains quite elevated for the year and the macro weak, then that would be the lower end of the range. And so outside of those sort of factors which can influence the outcomes. We still feel very good about our core performance and the self-help initiatives that we've talked about and ultimately achieving the algorithm in a normalized environment.

Okay.

And just taking a step back, Dave, I'm curious if you could Maybe talk a little bit about M&A and M&A pipeline and a couple of things here. You know, one, you know, you have a large competitor doing a big cash and carry deal. Does that change the way you think about anything strategically? And then could you talk about the pipeline generally? You know, we haven't seen that much from the company in the last, you know, sort of year or so. I'm curious as to how that might be shaping up.

Yeah, so appreciate the question, Ed. So our strategy around M&A hasn't changed. To answer your question directly about the JetPro transaction, that doesn't change at all the way we think about it. We're aimed at driving tuck-in acquisitions. And just as a reminder, we did do Chautauquas in the fourth quarter in Las Vegas. We've done five tuck-ins of scale in the past two and a half years or so. And that remains the opportunity for us. You know, I love our footprint. We've got scale in all the major MSAs. This is really about driving, you know, further productivity within our markets, taking miles out of our distribution network and finding the right companies that fit our culture with very strong management teams and good brand recognition locally with a high mix of independent restaurants. Those are the key elements that we look for. That's really driving our pipeline activity, and the pipeline remains extremely strong right now. We're active in several conversations, and as we always like to say, you never know when something's going to pop out of that. You can't really control the timing, but we're very active as we have been.

Your next question comes from the line of Lauren Silberman of Deutsche Bank. Please go ahead.

Hi. Thank you very much. I guess I just want to start with a follow-up on the expense side. In Q1, how much did weather impact expenses versus fuel? And can you just help us understand what percentage of the business you implemented your charges for? I think you may have mentioned 30 to 40% of fuel costs are covered, but I believe you're a higher contract business, so I would have called that number higher to try to help understand those dynamics.

Good morning. So out of the $0.04 in the first quarter we called out, it was about half and half between fuel and weather impacts within the quarter, so about $0.02 each. And overall for fuel surcharges, we recover about 30% to 40%. So we have them in place for the majority of our customers, contract and non-contract. And those are there in place. They're essentially a grid that's very tied to actual fuel costs. And the recovery rate is more of just what's charged versus what the expenditures are for fuel. And that process just runs every single month as we work through there. In the first quarter, as I think one of our peers talked about as well, you had the dynamic of fuel really spike in the last month of the quarter. And because of the one-month delay that's typically in place for surcharges, there wasn't any offset to it. But going forward, that would be – the recovery rate would be at a more normalized level. And then, as I mentioned during the call, we also have almost a third of our gallons for this year that are locked in at a contractual rate that we will pay less than market rates for.

Okay. Okay. And it's fair to assume that the Q2 guide embeds like a low single-digit headwind from fuel?

Yeah, it does. Fuel sort of within the quarter, you know, roughly a couple of points or so of headwind within the period.

On the independent case growth side, really good during the quarter, even a little bit surprising given the magnitude of the weather headwinds you called out. Can you help us understand, like, why expenses were seemingly more pressured than what the case growth would suggest? I guess April sounds like it's off to a good start too, but not sure if there's a consumer dynamic going on.

Thank you. Yeah, appreciate the question. Really excited about our continued acceleration of independent case growth, Lauren. You know, that's been not just a flash in the pan. It's been several quarters in a row now. We've got really good momentum. As you know, that net new account generation is the lifeblood of that activity. But I'm also pleased, and I've alluded to this in prior calls, that our penetration continues to improve. It was actually the best in Q1 since the fourth quarter of 2023 with the focus that we've had on both net new account generation and penetrating our customers. We also saw lines per customer be the best that it's been in quite some time. I think it's just the focus and the consistency here. And to your second part of your question around the expenses opposite the case growth, I think I'd point to the weather. So when we gave our guidance in February, We had about the same weather impact that we had in Q1 of the prior year. That continued throughout February and even expanded a bit even in the March with some spring storms and tornadoes in the Midwest. As it turns out, you know, per the comments we made prepared remarks, we had almost twice as many closure days as we did in the first quarter of last year. And when you get on those days, first of all, it's pure demand destruction because those cases don't come back. But on those days, you've got a lot of costs because you're still paying people and operating, but you don't have the volume coming in. And that's really the productivity headwind. And then even coming out of the storm, particularly in the southeast, where the cold persisted and all that. You show up at a customer's door and they're not open the next day, and so you're round tripping multiple times. It just added a pretty significant cost burden to the quarter. Completely isolated to those events. Structurally, nothing has changed. We still feel very good about our self-help. Our selector and driver turnovers, the lowest it's been since 2019. All those productivity initiatives are still in place. UMass, as I talked about. So, feel really good about the structural things and things that we can control. We just got hit with some challenges in the quarter.

Great. Thank you very much.

Thank you.

Your next question comes from the line of John Heinbacher with Guggenheim. Please go ahead.

Hey, Jay. I want to start on that drop size topic. It looks like that kind of got back to flat. Maybe dig a little more into wallet penetration in terms of where that opportunity is. And I know it's hard to deal in averages, but where that opportunity is, are you making headway in COP particularly, right? And do you think that those lines per account, can they improve a lot more here in the next, I don't know, six to 12 months to offset the macro or not really?

Good morning, John. I appreciate the question. And, you know, as I pointed to, really feel good about the pen momentum that we've got. It's been a point of focus for us for the last couple of years, despite the foot traffic challenges. And, as you know, that's where the traffic challenges show up is within that penetration portion. But we've had a really strong focus on it. Our team has embraced it. To your point, COP is a strong point for us. for quite some time and we have seen the penetration there amongst other categories like produce. But also really excited about the acceleration that we've had. We've got a strong focus on our Stockyards brand. And in fact, we're going to have a ribbon cutting for our new opening just outside of Charlotte in Lexington, North Carolina next month. A large comprehensive facility that will do all center of the plate including seafood and beef. Chicken, we're very excited about it. It's going to be a great shot in the arm for our team in the southeast. So, a lot of good momentum. And to your point, I think there's more to come.

And then, you know, secondly, if you think about the compensation changes you're making, right, and I know you want to go slow, and that's fair. But when you think about incentivizing folks, right, with regard to wallet penetration, And I do think your focus is going to be more local case growth, net new account wins. But maybe talk about what you want to initially get out of that transition as it relates to driving local cases.

Yeah, I feel really good about all the work that Randy Taylor and the team have done across the company preparing for this. Just a recall here, we started on this in the first quarter of 2025, so we've been at it for a year now. Change management is real important. I alluded to the training of our sales leaders that we had here in the past quarter. Everyone remains really excited about it. And again, these are very individualized conversations as we roll them out, hence the timeline here. I think we're going to look back on this as a transition point that's going to be meaningful for growth for the company. Feel really good about it. Stability is important in the sales force, John. I'm excited that actually in the first quarter, Our turnover for our territory managers with five years or more experience is actually better than it was a year ago, just underpinning the excitement that the sales force has here. Many of our sellers that have been with us more than 20 years experienced 100% commission plan in prior times. They're great advocates for the change here. They grew up under that sort of plan. So I feel really good about it. We're watching all the key metrics, as you would expect. We're launching next month. Key and A were the independent case groups. Thank you.

Thank you.

And the next question comes from the line of Mark Hardin of UBS. Please go ahead.

Good morning. Thanks so much for taking the questions. So, to start, wanted to see if you're seeing any shifts on the competitive front. You guys called out consumer sentiment continuing to fall as the quarter went on. Were upfronts pushed anymore in the industry as fuel prices climbed to close out the period? Just curious, historically, in these kinds of environments, What have you seen, especially as fuel prices cross certain thresholds? Thanks.

Yeah, I'll start here and maybe jerk off a little bit of color. But, you know, competitive intensity is always high in this industry. And I just point back, Mark, to the, you know, to the challenge foot traffic that we've had in here for so long. You know, it's been really intense for the past couple of years. It ebbs and flows in a given market at any given time. I wouldn't point to any significant pressure that we've seen directly as a result of, the fuel, but it's early days. Because it's so competitively intense all the time, you know, it's hard to tease those things out.

Dirk, anything you'd point to? I'm just going to say to your point on the upfronts, as Dave said, you know, nothing really as we went through the quarter. That is an area where And you've seen that as an industry increase a bit over the last few years, but it's still the minority of rebates. And, you know, us as a business, we don't try to lead with that as opposed to address it more reactively if competitors come in with it. But no meaningful change, as Dave said.

Okay, great. And then as a follow-up, your hospitality business put together some of the strongest organic case growth that we've seen in that category in recent periods. What's driving the incremental strength there, and would you expect for it to see much of an impact if fuel prices remain elevated, I guess, any more so than the rest of the business?

You know, we've got great teams, both in healthcare and hospitality. You know, we're excited about signature, that analysis, analogous capability to vitals that I alluded to in the prepared remarks. So, we're bringing some new technology to that part of the market in hospitality, bringing together, you know, a lot of our existing tools and capability, leaning in heavily to our brands in hospitality, and our team's really embracing that with our customers. You know, as we talked about last quarter, the pipeline for both healthcare and hospitality remains strong. We expect continued momentum that will carry into the back half of this year and even into 27.

Thanks so much. Good luck, guys.

Thank you, Mark.

Your next question comes from the line of Kelly Daniel with VML Capital. Please go ahead.

Good morning. Thanks for taking our questions. Dave, I wanted to go back to the outlook for total case growth this year and if it's reasonable to expect that at the low end of that 2.5 to 4.5 target or if the mid 3 is still on the table for the full year, can you walk us through some of the expectations by channel to get to that? Acknowledging it's really early in the year and there was the weather impact, but just trying to kind of think about the phasing to get to that case growth target for the year.

Yeah, appreciate the question, Kelly. Let me just start with the punchline. We remain confident in our case growth guidance for the year. We saw acceleration from Q4 to Q1 here, as we talked about, despite the macro and weather challenges, so feel really good about that. Underpinning all that is our three targeted customer types, which we remain very, very focused on. already commented on both, so we feel good about our momentum with independence. We've got strong pipelines in hospitality and healthcare. And I think the way to think about it coming off of that first quarter performance is that you can expect to see sequentially continued improvement as the year progresses, particularly in the back half of the year.

Okay, that's very helpful.

Dave, can you also just give us any color and feedback that you got from the Salesforce and the managers during the pilot program for the new Salesforce comp plan, acknowledging that you may want to keep some of that, you know, tight, but I guess, you know, for competitive reasons, but I'm just curious, you know, if there were any significant tweaks to the, to the plan, if there were any, and just kind of what you learned through that pilot phase.

Yeah, great question. We got really good feedback in color, and that's why we were thoughtful and ran those pilots for quite some time. Very engaged sales force. They sought to understand clearly the impact on their customers and how they can lean in more with them and how they'll get compensated for that. And I would just say, Kelly, any changes that we made were really tweaks, and I'm using that word thoughtfully. There was nothing structurally that we felt we missed, and the team really felt good about that. And then to the trainees that we've had in the launch, the prelaunch work that's been going on here for quite some time, you know, we're into sharing detailed information with markets, with our sales leaders, and right now with individuals in terms of, you know, what, as I mentioned previously, we would do, how they're getting compensated today and what that looks like in a new structure without any behavior changes. And importantly, you know, giving them some guidance around things they may or may not need to do differently. I think the beauty of this plan with the 100% commission is the simplicity of it. And at the heart of a lot of the feedback that we've gotten is that it's a lot less complicated than our prior compensation plan. They have a clear line of sight to their activities and how it's going to reward them. And we feel very, very good about that.

Thank you. That's helpful.

Thank you.

Your next question comes from the line of Alex Lago with Jefferies. Please go ahead.

Yes, thanks for the question. More to ask on the signature program and launch to help the hospitality operators. It really was eye-opening. I know you offered some of this technology and the capabilities, but it seemed like a big step. I'd love to hear some perspective around sort of the magnitude of this and where it takes you. It does seem like a meaningful catalyst to accelerate new customer growth. I'd love to hear your thoughts on where this goes.

Yeah, that's really the way we're thinking about it. Alex, appreciate the question. And I think, you know, in many ways, it's a simple launch because it brings together the best of the company and what we've offered to other segments of the business in a way that's directly supportive of those hospitality customers. It brings together capability on the technology side and many of the pieces that we have today, linking together our exclusive brands, some of the training and offering to those customers, how that can impact their profitability, and just from a process standpoint, lining our team up behind that. So, and as I mentioned in my prepared remarks, you know, similar to what Vitals does, it's going to help them with labor planning and staffing, how they optimize their costs, and helping them drive improved satisfaction for their hospitality customers. So I feel really good about it. At the heart of it, it's pretty simple. When you think about what we've done in other segments of the business, and our team is really embracing it and look for more good things to come.

And that's really, Alex, that's been a good unlock of vitals of it. It ties together these different solutions, solves and help customers in the way they think about their business holistically. And this is doing that same thing for hospitality customers. And we would expect similar levels of success and help for our customers that Vitals provides for healthcare.

Great. Thanks for the call.

Your next question comes from the line of Jacob Aiken Phillips with Milius Research. Please go ahead.

Jacob?

Hey, guys. This is Sam Barton. I'm for Jacob. Can you hear me?

Yeah.

Good morning. Good morning. Thanks for the question. So inflation is moderated meaningfully, and you reiterated roughly a point and a half of inflation for the year. Can you step back and talk about how U.S. foods performs across different inflation environments? You know, is there a level of inflation that is most constructive for the model? And how did the drivers of ease of growth change in a low inflation environment like today? Or is it a more normal low single-digit environment for a higher, more volatile inflation backdrop? Thank you.

Sure. Good morning. Typically, as a business and as an industry, 2% to 3% cost inflation is what we like over time. It provides a small positive to distributors. It's manageable for operators over time in order to pass through. And so being in this area where you're a little above or a little below that 2% to 3%, it provides a little bit of a positive or negative, depending what side you're on, to the sales line more so than it does earnings. The thing that we continue to be, again, encouraged by is that the grocery part of the business stays pretty stable, very, very modest inflation. And a lot of the movement you see from quarter to quarter tends to be around a few commodity categories. And that is where operators do have some flexibility in menu engineering and focusing more on one particular COP category, for example, if that is deflationary in the period or less inflationary than others. So in the environment that we're in, we can effectively pass it through. And even in those periods of high inflation coming out of COVID, as a distributor, you have to have good processes around inflation, deflation, and our expectations will continue to operate very well here.

Great. Thanks so much.

Your next question comes from the line of Peter Salah of BTIG. Please go ahead.

Great. Thanks for taking the question. Given all the noise in the quarter with weather and higher gas prices and the tax refunds, I was hoping you guys would give us a little bit more detail, you know, maybe by cuisine or by region, if you're seeing any strengths or pockets of weakness that really stand out. Just any detail on that would be really helpful as we look a little bit closer at the consumer, given all the noise that we're seeing here.

Yeah, Pierre, appreciate the question. Let's start geographically. I wouldn't point to anything in particular except just highlighting the obvious where the storms were. You know, there were some challenges there. I think cuisine types, you know, as you think about our strength, bar and grill remains a strength. Hispanic is doing well. That mid-scale family dining is doing well for us. And, of course, white tablecloth has held up pretty well through these challenges. And I would point to those as three or four areas where our share gains in the quarter outpays the average for the company. But not surprising. Those are areas we've been focused on for a while, and so it's good to see the continued momentum there.

Great. Thank you very much.

Thank you. Your next question comes from the line of Brian Harbour with Morgan Stanley. Please go ahead.

Yeah, thanks. Morning, guys. Just the compensation changes, are you, is that all markets that are going to go next month? And I guess, I know it could take a couple of years, right? But like, Could you just give us a little bit more of a sense for some of the timing? Is it more of kind of a tale of folks that will transition, you know, over a longer time frame?

Yeah, so to answer your first question, Brian, yes, everyone will go live across the company next month. We've been building this for a long time, starting with those pilots in the fall in the communications that we've talked about. And really the timing is driven by the individual nature of each of these conversations and Any tweaks in roles and those sort of things that we're talking about and that's why we're going to lean into this with pace but to be clear Everyone is going to be paid on the new compensation structure beginning next month So we do expect it to ramp up through the course of time I expect some limited impact in the back half of this year and then then into 27 and 28 We expect more meaningful impacts here. But again, we're excited. This is a long-term play for us And we're going to do it, right?

Okay, got it dave, um With some of the, like, AI-enabled tools, how do you sort of, like, measure the success of those? I mean, you know, are customers that – are you seeing better penetration with customers that use those? I mean, maybe on, like, the Salesforce side, are you seeing salespeople be more effective? I guess, like, how do you kind of judge that over time?

Yeah, I think all of that, and for each one of these, we do have measures in place. And at the heart of it has been, you know, two things from the very beginning around all our technology and capability that we're wrapping with AI is to drive that relationship deeper with our customers and provide more meaningful capability and, importantly, make it easier for them to do business with us, and then secondarily improve our Salesforce productivity. So just the example I used today, Brian, around MenuIQ. You know, the chef comment that I quoted there, something that used to take hours in spreadsheets, they can do seamlessly, very quickly with AI and get those recommendations and understand their menu costs, understand where the profitability is coming from or not and where they may need to make, you know, changes. That's powerful. And that is something that our salespeople partner with our customers on. And it helps the customers. It moves it quickly. And it frees up our salespeople to go drive future growth. And I think it's really hard to point to any one thing at the heart of our success and the important acceleration that I spoke about with independent case growth. But it's all working together. And I think the traction that you see us getting, importantly, the penetration that I talked about here, it's all part of it.

Your next question comes from the line of Karen Hothouse with Citi. Please go ahead.

Hi. Thanks for taking the question. I wanted to dig in a little bit about how you're thinking about the hospitality business as we head into the peak kind of summer travel season. I think there's a number of moving pieces. Last year you had a pretty soft summer for inbound international tourism to the U.S. this year potentially the benefit around World Cup games being played in the U.S. And then on the macro side, I think the debate of, you know, our gas prices and that headwind in the broader people are trimming spending sense are potentially, you know, a positive if it keeps, you know, people domestic and the kind of mental idea of a staycation summer potentially being good for restaurant spending. Just How are you thinking about that when we think about 2Q guidance and the year?

Yeah, appreciate the question, Karen. So just at the highest level, you know, hospitality trends tend to follow what's going on with the restaurant traffic, kind of ebbs and flows there. I think at the highest level and the way to think about it for us is like you think about the other pieces of our business. We don't need the macro to improve to control the outcomes. And that's why, you know, I spoke to the pipeline that we had both in healthcare and hospitality remaining strong. That's really what's been fueling our growth despite some of these macro challenges that you mentioned last year and all that. You see us to continue to lean into that growth and accelerate that going forward. And that's really going to be the driver. Now, the World Cup, It could be a nice shot in the arm that we're all counting on here through the summer, but that's going to come and go, and that's not structurally going to change our performance. What's going to change our performance is our ability to continue to win and take market share, and that's what our team's focused on.

Great. Thank you.

Thank you.

Your next question comes from the line of Vanilla Gargulio of Bernstein. Please go ahead.

Thank you. Dave, I want to go back to your last point of, you know, having resilient performance through the cycle. And as you pointed out, the traffic has been quite elusive for multiple quarters now. So do you think we are entering a phase of permanently low or declining volumes? And if that were to be the case, what would be a reasonable top-line algorithm for U.S. foods?

Good morning. This is Dirk. I'll take that one. I think it's ultimately our expectation that we would continue to outperform the macro. So you've seen, I think if you think about what would be reasonable, you know, look at how we've grown relative to the industry in the last few years when traffic has been slower using black boxes, the proxy, where especially in our three target customer types of independent healthcare and hospitality, we've outgrown the market, and that would be our expectation going forward. chain and other, we'd expect to perform more like the overall market. So since we don't know exactly what that looks like, the thing that we continue to focus on is our share gains and what we can control. And broadly speaking, we're pleased with the progress we're making and continue to work the pipelines hard in each of those.

Thank you. And then a few quarters ago, you were looking for strategic options for ChefStore and ultimately decided to retain the business. So now that you've observed the evolution of the performance over more quarters, do you see more revenue synergies from the integration of a cash-and-carry business with your delivery business? And what is your expectations of the business going forward?

Yeah, I appreciate the question, Danilo. We hadn't talked about ChefStore for a while. The way we left it – was that I and I still haven't changed my belief. I think fundamentally, we're not the right term, right long term owner for that business. And I would point you back to at the heart of our desire to sell it originally was just the synergies in that acquisition have not played out. And just recall, most of those assets were purchased west of the Mississippi River. And they just are not in the heart of our broad line markets. So if you think about existing customers going into those stores, It becomes more challenging when they're 20 to 30 miles away from your core customers and markets. But having said that, we remain focused on that, and we will retain that business as long as we need to, and the business has improved dramatically. You know, one comment I would make is, you know, you've seen one of our large competitors announce an acquisition in the space. That really does not change at all how I think about our chef store business at all. But, you know, it's going to be an interesting one there with, you know, the number one broadliner buying the largest cash and carry. Certainly getting a lot of industry attention. You know, the independent restaurant coalition is potentially intervening in the case. And so it's going to be interesting to see how that progresses, including, you know, the regulatory process here over the next little while. So we're watching that, of course.

Thank you. Thank you.

Your next question comes from the line of Margaret May Binstock of Wolf Research. Please go ahead.

Hi, guys. Thanks for taking my question. I just wanted to ask on Pronto. I know you guys just went live in your 47th market. As you guys make these investments in Pronto this year, where do you see the biggest opportunities to accelerate? Is it more trucks in existing markets, new markets, or just deepening Pronto next day penetration with existing customers? Thank you.

Appreciate the question. It's all of the above. You know, again, originally we launched that in markets aimed at identifying and obtaining new customers several years ago. We're excited about the next day, clearly new launch for us. Importantly, you heard me talk about 27 markets today with 10 more to come. And also, we have the opportunity to penetrate our existing markets with new trucks, which we continue to do. So it's really all of the above. We're excited about Pronto and fully committed to that billion and a half dollar revenue next year. Thank you.

And your final question comes from the line of Christabel Rocha of J.P. Morgan. Please go ahead. Hi, good morning.

This is Christabel on for John. On private label, you kept it at 54 with core independence and mentioned it as a growth opportunity. What actions are being taken to grow this mix, and are you currently happy with the selection you have, or is there any gaps?

Yeah, I'm really pleased with the progress we've made over the last couple years with our exclusive brands. We've got a great portfolio of exclusive brands, more than 22 brands, 10,000 products. Our sales force is really leaning into those brands, and again, As I stated in my prepared remarks, it saves our customers money and they're more profitable for the company. And importantly, in the new sales compensation structure, our sales force is going to be heavily incented to sell our brands. And so I think we've got it lined up structurally where we will continue that momentum. The thing I would point to the most and what excites me about the future, and I say this all the time, we don't have a ceiling in our ability to penetrate the market with our exclusive brands. 25% of our existing independent restaurants are already penetrated at 70%, and importantly, 45% are above 60%. So we've got a long track record of success there, but importantly, a long runway of further penetration and growth with our brands, and you'll continue to hear us talk about that momentum.

Thank you. I will now turn the call back over to Dave Clifton, CEO, for closing remarks.

Appreciate everyone joining us today. We're excited about our momentum. The structural improvement that we're driving in the business will continue, and we are fully committed to achieving our long-term growth algorithm. Have a great day and a great week. Thanks.

Thank you all for joining. That concludes today's call. You may now disconnect. Have a great rest of the day.