Q3 2019 Earnings Call
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Steve.
Listen listening.
So I.
[laughter].
Thank you great.
Good morning, everyone.
Welcome to our third quarter fiscal year 2019 conference.
[laughter].
Joining me for today's call, our Pietro century, I know our CEO .
And Dirk Locascio, our CFO .
Okay.
Oh, Yeah turned Dirk will provide an update on our results for the third quarter.
And the first nine months of fiscal 2019.
[laughter].
Well take your questions after our prepared remarks conclude.
Please provide your name your from.
And limit yourself to one question.
During today's call and unless otherwise stated.
We're comparing our third quarter result.
To the same period in fiscal year 2018.
[noise].
Our earnings release issued earlier this morning.
And today's presentation slides.
Can be accessed on the Investor Relations page of our web site.
Also during today's call, we will refer to certain organic financial.
Okay.
Organic results.
Absolutely.
Contributions.
[laughter].
From S.G.H. good group of companies.
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Which we will refer to as.
Good.
[laughter].
He group acquisition, which closed on September 13th.
2019.
[laughter].
And is included in our financial results from this date through the end of the third quarter.
[laughter].
[noise].
In addition to historical information.
Certain statements made during today's call are considered forward looking statements.
[laughter].
Please review the risk factors in our latest Form 10-K filed with the FCC for these potential factors.
[laughter].
Which could cause actual results to differ materially.
From those expressed or implied in these statements.
[laughter].
And lastly, I'd like to remind you that during today's call, we will refer to certain non-GAAP financial measure.
[laughter].
Oh reconciliations to the most comparable GAAP financial measures.
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Are included in the schedules on our earnings press release.
[laughter].
Now I'll turn the call over to teach them.
[laughter].
Thanks, Melissa and good morning to everyone.
<unk>.
Well begin or start, earning third quarter earnings calls like too with an overview of this quarter's results.
[laughter].
First.
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As Melissa mentioned, we completed the acquisition of the food.
[laughter].
And with the divestitures behind us our integration efforts are off to a good.
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I'd also like to take this opportunity to welcome to 3000 figure.
[noise].
It's to U.S. food.
<unk>.
[laughter].
Our core business continued to deliver both volume and profit.
Case growth for the quarter was 3%.
[laughter].
While organic case growth was 4.9%.
Led by organic independent restaurant growth of 4.2%.
Okay.
We expanded our operating leverage for the Fiftyth consecutive.
And this quarter.
Gross profit per case exceeded operating.
[laughter].
The case by nine cents.
[laughter].
Growth in private.
Yeah.
And strong great performance with a major contributors to the gross profit per case.
<unk>.
Well distribution costs remained in line with our full year.
Yes.
Our focus on profitable growth.
Helped deliver organic adjusted EBITDA growth of 6.7%.
Or 8.4% when we include the two weeks of the food.
Into our results.
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Lastly, we are raising our adjusted EBITDA guidance.
[laughter].
And now expect to deliver.
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Our 6% organic adjusted EBITDA.
Fiscal.
Once you 90.
<unk>.
Moving to slide three.
Let's now take a closer look.
And our volume growth for the quarter.
[laughter].
As I mentioned.
[noise].
Oh organic case growth.
90 basis.
[laughter].
So for the quarter.
<unk> driven by organic independent restaurant growth of 4.2%.
[laughter].
Both with independent restaurants with solid.
Albeit down slightly from the first.
[laughter].
We attribute this to the combination of a slight slowdown in the industry.
We have selected markets slowing down.
We expect fourth quarter.
Our volume growth with independent restaurants to be inline with our Q3 results.
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For full year results to be at the midpoint.
Of the 4% to 5%.
[noise].
So we gave earlier this year.
<unk>.
Our outlook for independents remains strong.
And we expect to continue to possibly Gainshare.
While growing up roughly twice the market.
Using technomic, most recent market forecasters roughly 2%.
<unk>.
Continuing on slide three.
Organic healthcare and hospitality volume was up 60 basis.
As much.
Correct.
Yeah.
Our growth was impacted by the loss of a large hospitality customer during the quarter.
Right.
Which means that growth for the fourth quarter will be slightly above flat.
And around 1% for the year.
Having said that we continue to feel good about our position with this group of customers.
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And the strengthening pipeline leaves us.
So we will approve growth in healthcare and hospitality.
In the news.
[laughter].
Last in our discussion of volume for Q3.
Organic lithography all other group of customers was down 90 basis.
[laughter].
Consistent with the decline in same store sales.
So that we saw black box.
Before.
So.
For this quarter.
Right.
We also experienced some minor delays and onboarding, some new chain business.
Yes.
Business that has now shipping.
So as a result would you expect positive case growth.
For the fourth quarter.
[noise].
And roughly flat case growth.
[laughter].
For the full year.
Yeah.
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Overall in terms of the macro.
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We see no change on the horizon.
And the competitive environment.
Yeah.
Steve.
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Let's now turn to.
Slide.
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Before.
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Our profit growth its independent.
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Does demonstrate that our great great food made easy strategy.
Continues to resonate with customers.
[laughter].
So I'd like to take a minute or sell to update you on our continued innovation on.
Yes.
[noise].
Let's start on the left hand side of the page.
Yes.
With an update on the long standing pillars of our.
Product innovation and e-commerce .
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Now have 61% of independent restaurant sales in more than 70% of total sales coming through our e-commerce .
Yes.
Recently completed research that we commission indicates that you us foods.
Online ordering tools continue to be rated the easiest to use in the industry.
And that same research indicates that online ordering continues to grow and importance for customers.
Okay.
We believe that our technology remains the key differentiator.
[laughter].
In a competitive advantage for us.
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Scoop.
Serves as a high profile.
Breast to launch new innovative.
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Under our private.
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So if you recall our summer scoot focused on products that help operators to meet the growing demand for on the go.
Yes.
That's just compostable take out.
Okay.
And it delivered a trial rate of 42%.
Yeah.
This was our third consecutive watch where the trial.
Yes.
Of our exclusive and innovative.
[laughter].
Yes, that's over 40%.
Yeah.
Our fault.
Which launched in September .
Hi, large global flavors in food.
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And many of the products were developed in collaboration with chefs, we now for pioneering work.
In their respective.
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And finally.
Yes.
We continue to expand private brands as a percentage of.
Sales.
Yeah.
At a rate of approximately 100 basis.
This points per.
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And this quarter.
Right.
36% of net sales dollars came from our private.
It's probably.
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[laughter].
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Excuse.
Yes.
Let's move to the right hand side.
Of this.
Well I'd like to give an update.
And our more recent efforts to.
Nominee channel approach.
We expect.
[laughter].
Our great food and 80 this strategy.
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Product.
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Also allows us to reach customers in dense urban areas that are not easily service with larger.
[laughter].
Slottow uses vans and smaller straight trucks.
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Which are able to more easily maneuver around crowded crabs areas like Miami Beach.
[laughter].
Okay and allow us to meet the requirements for small drop sizes on these dense.
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Bronto is helping us attract new.
Independent restaurant customers.
In these markets.
[laughter].
You'll remember we piloted pronto in 2018.
Okay.
We've now expanded service from three to eight markets in 2019.
Yeah.
We're pleased with the results and we plan to continue to expand pronto to new markets in 2000.
Thanks.
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Thank you.
Yeah.
As you excludes.
[laughter].
Which we rolled out nationally to independent customers.
In our.
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Yes. This provides our customers with access to.
An endless aisles.
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Not stopped in our local warehouses.
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Customers can.
Yes.
What do you 5000 items in addition to the 10000 than a typical BC.
And our goal is to continue to add categories and vendors to this.
Yes.
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Customers like these reviews.
We can order the product, while placing their regular orders and.
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Stop.
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Directly to their locations.
[laughter].
And we like it the model because it has no touch model.
Which allows us to compete more effectively.
Specialty distributors.
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Yes.
Okay.
The third leg of our omni channel strategy is Chester.
Our cash and carry.
These retail locations allows to increase our share of wallet with existing customers.
Well also reaching new customers.
Okay.
Our original four stores all of which have been opened several years continued to show.
Same store sales increases in the high single.
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So while our newest stores continue to prove the merits of this omni channel approach.
[laughter].
For existing customers.
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Not only by from this channel, but increase their purchases that are delivered from.
Yes.
So this success with plans to add to our.
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In the coming years.
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I'm now on slide five.
[laughter].
We completed the acquisition of the food group in September .
[laughter].
And completed the mandated divestitures.
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Of the three facilities and can't Boys in Fargo in mid October .
This means that within 30 days, we were able to successfully move over 1000 customers from the Kent facility to our.
[laughter].
No notable service.
Yes.
The seamless execution of these divestitures.
Augurs well for the integration work that lies ahead.
Yes.
[noise].
We are nearly stages of our integration efforts.
And we are off to a good.
Okay.
Our new northwest region leadership team has done.
In place.
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We have converted the food group financial systems to the Us foods fiscal calendar.
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We've also completed the setup, a food products and customers in our systems.
Which is a key first.
In the systems conversion.
Yes.
Our efforts in the next few months, we'll be focused on building excitement with.
Customers and associates.
So.
Including launching some our best selling screw products to customers.
[laughter].
And completing the rebranding of office of the facilities and fleet.
In that region.
Yes.
[laughter].
We'll continue to update you as the integration progress.
Yes.
Before I turn the call over to John I'd like to talk about supply chain for a moment.
<unk>.
If you did communicate a few weeks ago their supply chain officer had left the company and we have begun to search for his replacement.
On an interim basis, Jake wasn't that got one of my direct reports.
Sure.
Let's assume responsibility for supply chain.
Jay is the VP of local sales and field operations and the PNM enforced.
And he brings 25 years of experience.
With us foods, including.
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Our prior roles as a division president and manage the region.
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We remain committed to the supply chain roadmap that we presented 18 months ago.
And Jason really already with the operations the team.
And that roadmap.
I will ensure we continue to make progress.
Yes.
Service levels to cut to customers continued to perform above last year.
<unk>.
As evidenced by our continued.
I will now turn the call over to our CFO Dirk Locascio for walk down of our financial theirs.
Yes.
[laughter].
Thank you Pietro and good morning.
In the third quarter.
We continue to grow with our target customers.
And we produced strong earnings growth.
Sure.
As Patrick noted.
Total case growth for the quarter was up 3%.
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And with organic total case growth up 90 basis.
Yes.
<unk>.
So grew organic independent restaurants, 4.2%, which is approximately twice the market.
Yeah.
Right.
Okay.
We continue to operate in a higher cost environment.
But I've been able to offset a portion of a higher distribution wages.
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So with our expense control initiatives.
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And have continued to expand our operating leverage.
Okay.
This resulting in organic adjusted EBITDA growth of 6.7.
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And strong adjusted diluted EPS growth of 12.1% for the.
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For the full group contributed one penny or approximately 2% to our adjusted diluted EPS growth for the.
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As a result of our business performance.
[noise].
So we're raising our full year organic adjusted EBITDA growth guidance to 6%.
[laughter].
And raising the lower end.
None of our full year adjusted diluted EPS guidance range by five cents.
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Resulting in a new.
$2.35.
So $2 or 40.
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Slide.
[laughter].
Third quarter net sales.
$6.5 billion.
<unk>.
An increase of 6.1% from the prior year.
<unk>.
We experienced 3.1% year over year inflation and product mix.
<unk>.
And 3% case growth.
Right.
The addition of food group contributed 2.1% to case growth for the.
Inflation was broad based across multiple product category.
<unk>.
And remains manageable.
Well.
While providing a modest tailwind to gross profit dollars.
[noise].
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On slide.
We delivered strong gross profit results again this quarter.
Our gross profit was $1.2 billion.
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A 4.3% increase over the prior year period on a GAAP basis.
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5.3% increase on an adjusted.
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As a percent of sales gross profit was 17.7% on both the.
At adjusted.
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Yes. This is 30 basis points lower than the prior year period on a GAAP basis.
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20 basis.
Suspects lower on an adjusted.
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With a larger decrease in GAAP results due to an unfavorable year over year change in our LIFO.
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The 20 basis point decline and adjusted gross margin.
This is due to inflation on items that we sell with a fixed gross profit dollar amount per.
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Some inflation occurs on these items, we make the same amount of gross profit dollars.
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But the margin rate can compress.
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The impact of inflation on gross margin for the.
<unk> was approximately 25 base.
At this.
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Many our adjusted gross margin for the quarter would've been up slightly if not for inflation.
<unk>.
Our gross profit performance continues to be driven by private brand growth.
Yep.
An inbound freight optimization as we previously.
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And also as Patrick mentioned in the third quarter, our private brand growth reached 30.
6% of net sales.
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Continuing our growth of approximately 100.
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It's a.
<unk>.
Moving now to operating expenses on slide.
Okay.
AAPEX increased 4.2% from the prior year quarter.
The $968 million.
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Driven primarily by higher distribution and acquisition related.
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Adjusted operating.
<unk> increased $30 million.
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Our 3.7% over the prior year quarter.
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As a percent of sales was 13%.
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A decrease of 30 basis.
This.
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Adjusted operating expense as a percent of sales would have increased approximately 30 basis.
Points without the impact.
The.
Sure.
Good product inflation on.
Net sales.
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While we continue to manage through a tougher supply chain operating.
[laughter].
We started to see a modest reduction in fuel costs.
<unk>.
We expect to continue to see modest favorability in fuel on a year over year.
<unk>.
Our supply chain.
Which consists of several warehouse and delivery productivity initiatives.
Continues to progress.
<unk>.
We believe our strategy to improve supply chain has the right.
And we continue to execute against us.
<unk>.
But the goal of further improving operational efficiency.
Yes.
Continuing to embed continuous improvement in our operations.
<unk>.
Okay.
On slide nine.
Our operating leverage gain for the quarter was nine cents per.
<unk>.
She is an improvement over the first two quarters of the year.
<unk>.
Hi, good work, we're doing around gross profit of Opex.
Continues to consistently drive meaningful expansion in our operating leverage.
<unk>.
We're on pace for our fourth straight year of high single digit per case expansion in our operating leverage.
<unk>.
As we begin incorporating the food group into our results.
<unk>.
We do expect to show a moderate decline in gross profit per case.
<unk>.
And a small improvement in Opex per case for the next.
Export quarters.
<unk>.
If you recall the food groups adjusted EBITDA margin is lower than ours.
<unk>.
We expect to improve this margin over time as we implement the synergies we've previously.
<unk>.
Im now on slide 10.
<unk>.
Third quarter, adjusted EBITDA was $307 million.
Up 8.5% over the prior year and organic adjusted EBITDA was $302 million up.
6.7% over.
For the prior year period.
Good.
As a percent of sales adjusted EBITDA was 4.7.
Yeah.
An increase of 10 basis points over the prior year.
<unk>.
Adjusted diluted EPS increased seven cents or a strong talent.
4.1% 65.
For share for the.
<unk>.
Yeah, as we continue to grow adjusted diluted EPS.
Faster than adjusted EBITDA.
<unk>.
Inclusion of food group had approximately a one penny positive impact on adjusted diluted EPS for the quarter as I mentioned earlier.
<unk>.
As we highlighted in September .
We're also now excluding intangible amortization from our adjusted diluted EPS.
<unk>.
We have revised our historical numbers to reflect this.
And ensure all prior years or on a comparable basis.
<unk>.
Yes.
For full year 2019.
In existing us foods intangible amortization.
And so excluding the amortization from the food group acquisition.
And is roughly $39 million.
<unk>.
And finally on the far right.
Third quarter GAAP net income decreased 7%.
<unk>.
While adjusted net income increased 13%.
<unk>.
The decline in GAAP net income was primarily due to a $10 million higher LIFO charge.
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How are your current.
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And the addition of food group integration related.
<unk> expenses.
<unk>.
Sorry, your tax expense was lower as a result of onetime deductions.
<unk>.
Allowing under the tax cuts and jobs.
Right.
Turning now to cash flow and net debt on slide 11.
[noise].
Operating cash flow for the first nine months of 2019 was $559 million compared to $444 million.
In the prior year.
Sure.
The increases.
Related to prior year pension contributions of $70 million.
<unk>.
We discussed last quarter.
It did not repeat.
Yeah.
The combined with improved operating results.
<unk>.
Our business continues to produce strong operating cash flow that supports our ability to de lever from the $1.8 billion of debt incurred to finance the food group acquisition.
Net debt at the end of the quarter was $4.8 billion.
<unk>.
An increase of approximately $1.5 billion from the year end 2018.
Due to the acquisition of the food.
Our net debt to adjusted EBITDA leverage ratio at the end of the third quarter was 4.2 times.
<unk>.
The calculation of our leverage presented on slide 11.
[laughter].
Includes two weeks of adjusted EBITDA for the food.
Which coincides with the amount of time, we own the food group in the.
<unk>.
Sure.
If you were to do the same calculation with a trailing 12 months of adjusted EBITDA for the food.
Our leverage ratio would've been approximately 3.8 times.
<unk>.
As a reminder.
We expect to return to three times leverage ratio prior to the end of 2020.
<unk>.
And we'll continue to demonstrate a disciplined approach to de.
Based on our solid operating cash.
Oh.
Yeah.
Now moving to slide 12.
Oh.
Now.
As I mentioned before we're updating our full year fiscal 2019.
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Total case growth is expected to be between four and 5%.
<unk>.
With organic case growth now expected to be between one and 1.5.
Uh huh.
Adjusted EBITDA growth inclusive of food group is.
Expected to be 8.5.
<unk>.
And as I mentioned.
<unk>.
We are raising our.
Organic adjusted EBITDA guidance.
[noise].
So.
[laughter].
We're also raising the lower end of our adjusted diluted EPS range by five cents.
Resulting in a new.
$2.35.
<unk>.
So $2 or 40.
<unk>.
Our updated interest expense guidance of $185 million now includes additional.
Net debt.
<unk>.
Related to the food group acquisition.
Yes.
And changes to our guidance numbers related to Capex and depreciation and amortization are also shown on the slide.
Yeah.
In our inclusive of the food group.
<unk>.
<unk>.
In summary.
We're pleased with our results for the.
Yes.
Our solid organic EBITDA growth of 6.7.
And double digit adjusted diluted EPS growth highlight our commitment to profitably growing the business.
<unk>.
Yes.
We continue to grow independent restaurant volume faster than the market.
Focusing on executing our supply chain roadmap in a challenging operating environment.
<unk>.
At the same time working on successfully integrating them.
[laughter].
[noise].
I would like to now opened.
Call for question and answers.
<unk>.
Uh huh.
All.
Right.
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Yes.
[noise].
Yeah.
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Yes.
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Great.
Yes.
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Bye.
Composite.
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[laughter].
Yeah.
<unk>.
From JP Morgan.
The company.
Hi, Thank you.
The question is on.
Overall consumer credit quality at this point in terms of.
Yeah restaurants in particular.
With some of I think some unevenness in terms of.
Independent restaurants that may have happened.
This past quarter, especially may have regionally happened.
This past quarter.
Are you beginning to see any signs of.
Stress in terms of independent restaurants are you beginning to see any signs of stress.
Not at all in terms.
In terms of credit quality are you asking you know your salespeople and your.
Representatives.
[noise].
I've yet to be more careful with you with credit going forward just trying to look for some signs of.
You kind of late cycle change that you maybe noticing from a credit worthy.
Perspective in terms of.
And I've a follow.
<unk>.
Good morning, John This is dark.
I'll take that so.
[noise].
Overall, we're not seeing a significant change and the credit environment.
[laughter].
You do have restaurants that are opening and closing at any point in time, and we do continue to see that.
From a process perspective.
[laughter].
What our credit.
Processes.
It's.
Yes.
Quite.
So there's really not a lot of change that we have to.
<unk>.
Two in that space.
Okay.
We're always trying to manage through.
The effective process for the same time.
[laughter].
Serving our customers by.
Having.
[noise].
Timely reactions to them as far as.
Yeah.
So overall not a big.
[laughter].
Okay. Thank you and then secondly in terms of US foods direct which is an interesting announcement. It does look like those products are going to be.
Yes, yes and Fedex.
Are you going to be more or less a marketplace for the products are going to be drop.
If directly from the manufacturer.
Yeah.
Based on the first point and secondly.
Would it make sense at some point.
Broaden that.
To overall consumers outside of your your larger.
Restaurant.
Okay.
<unk>.
So I think marketplaces are good.
Good.
<unk>.
Analogy or a good word to describe it.
We chose.
Yes.
Direct because I think that.
[laughter].
Given that we're in the delivered business direct kind of conveys with this value proposition is but it's got.
[laughter].
The attributes I think you're implying in terms of.
A broad assortment.
[laughter].
In terms of.
Expanding it.
<unk>.
Yeah.
No we always want to make sure that we can meet the promise.
Yes.
<unk>.
Our brand promise and we've started this independent.
[laughter].
Prototype this last year in four markets we've now.
Extended stay independent restaurant.
[laughter].
Before we would go out to the consume and.
We haven't contemplated that.
[noise].
We still have other customer types within our.
[laughter].
Our own environment that we would roll out to one.
<unk>.
[noise].
Thank.
<unk>.
Hi.
Next question.
Yeah.
From the line.
Yeah.
Your line is.
<unk>.
Hi, This is Blake on for Chris.
Can you talk a little bit more about why you lowered your organic.
This growth expectations, how much is due to that how much should that it's due to the.
Hospitality customer loss, you mentioned and then you.
I mentioned some delays with the checking account just wondering how much that.
Factored into it.
<unk>.
Sure so.
Yeah.
I think there's.
As I mentioned Blake the.
Okay.
Loss of this.
One customer and the hospitality segment, which is.
<unk>.
Which is.
Small.
But I would characterize unusual obviously had.
Sure.
Apart to play if you look back at Q2.
Right.
We were I think 1.6% we were trending very close to the lower in the guidance that we've talked about.
And unfortunately a setback.
Yes.
As a set of stock but.
Yeah.
We still feel good about.
The pipeline, we have in healthcare hospitality and value proposition.
On the all other site, which you would you referred to.
[laughter].
We feel that we were really on track.
There's always some timing differences in terms of win.
Sure.
Customers come onboard Onboarding is a complex process, but.
Yeah.
We feel like.
Based on the customers are shipping now we should be in positive territory.
Before.
[noise].
The only factor that really.
[laughter].
Good.
[laughter].
Impact that up or down is the environment for chains, which as you saw it was a little bit worsen.
[laughter].
In the last few months and it's been.
For the or do we feel that we're right on track and the thing worth reminding folks is.
Yes.
The customers, we are bringing on board and the all other.
Considerably.
More attractive to us.
<unk>.
Not only than those that we.
Exit over time, but.
But the average with customers within.
For customers so the.
For the customer optimization strategy that we've talked about.
[laughter].
For a couple of years now is really yielding kind of.
Yes.
To achieve.
[laughter].
Yeah.
Got it thank you very much.
[noise].
Your.
Next question.
Yes.
From the line.
Yes.
Yes.
Bank of America.
Yes.
Good morning.
Thanks for taking.
Yeah.
Question.
<unk>.
I wanted to touch on.
[laughter].
Independent case growth and to see if you.
Good comments on the exit.
For the quarter.
And quarter to date.
And.
I think it may sound like the your outlook.
What's the kind.
Every Q.
Yeah.
I would imply maybe a little bit of.
Choppiness.
Correct.
<unk>.
Yeah.
Fourth quarter, So I wonder if you can.
Just give a little bit more color on.
Yes, I think we expect to fourth quarter to be inline with the third quarter based on where you sit now.
<unk>.
<unk>.
I think in terms of.
The trends that might be.
Informing that.
Maybe add a couple of words on that so from a.
[laughter].
External perspective.
I think the thing to remember is.
So very positive.
For independent.
[laughter].
If you look at the demographic factors that underlie that.
[laughter].
We look at food.
That's consumed.
Away from home.
Continues to gain share.
Because I like to say from food consumed at home.
We expect those two lines across.
Yes.
Next year the laughter.
<unk>.
And the macro environment in terms of unemployment disposal implement and fuel prices is very positive.
[laughter].
Yes.
And if you remember the last call I have talked about.
Technomic lowering its outlook by about 30 basis points.
[noise].
Shipment data.
Yes.
First half versus.
The second half when the industry seems.
In line.
<unk>.
With that order of magnitude, so theres a little bit.
From.
[laughter].
From environment perspective, it's still very very positive.
[laughter].
And from our end.
We always look at the as I talked about the.
Value proposition Richard customers continues to resonate.
[noise].
We always have a portfolio of better performing.
Geographies and less willing geographies and.
[noise].
We're going to wait a few kind of step back.
Typically have a few step up and that's kind of normal course of business and we take all that into.
That's why we're calling flows.
To be in line with.
The third quarter.
[noise].
Gotcha.
Yes.
Helpful.
And then if I could.
Pivot to the organic.
Okay.
EBITDA.
Okay.
Yes.
Guidance I think it implies a bit of an acceleration in the.
This quarter.
Can you just give a little bit more detail.
Yeah.
Main drivers.
With.
Yes.
Sure. Good morning. This is Derek so.
When you look at where we our year to date and talking about the organic it's actually.
[noise].
Implies more in line.
For the fourth quarter with where we've been running this year.
Yes.
Gotcha.
And then can you.
Just.
Talk about.
The.
Okay.
At higher or lower than.
And what your.
Sure I think the.
[laughter].
Probably the main thing that I would call out because I think we found as.
<unk>.
Got you had mentioned.
[laughter].
The operating environments, although its remains a tougher environment has been fairly stable.
[noise].
Turnover has stabilized, albeit at a higher level than historical level. So.
[noise].
We think that stays.
Pretty consistent through the fourth quarter.
[laughter].
And really it would be more probably macro factors.
As far as the environment or things of that nature that would.
Yes.
Impact at more than some of our internal.
So initiatives or focus areas.
[laughter].
Sure.
I.
Thanks.
[laughter].
Next question comes from.
[noise].
Your line is.
<unk>.
Great.
Thank you very much.
Okay.
Two questions.
First one just on.
The independence.
I know you're talking about gaining share with this.
Yes.
Customer group and.
And the growing twice the rate of the broader market.
Seemingly your peers are pursuing.
Similar accounts I'm, just wondering if you were to.
Prioritize the factors leading to your.
Success and this outsize growth.
[laughter].
Leading.
Lower pricing or is it more.
Pushing the better service or technology, why do you think you're having.
Success, you're having gaining these independent accounts when everyone is pursuing similar.
[laughter].
Yes, so first.
It's a very fragmented industry right. So I think the fact that we're having gains.
[laughter].
That we're having.
Yes.
A lot of a lot of.
Uh huh.
Because the fragmentation I don't know that.
Yeah.
[laughter].
Okay.
Folks feeling the impact to that which I think is sometimes some of the concern.
That underlies that question.
In terms of.
Leading to the growth.
It really gets down to our value proposition product innovation technology.
That's why did spend a few minutes.
[laughter].
It is talking about it we.
Yes.
We embarked on this path many years ago.
Yes.
For now standing still we continue to evolve how that value proposition shows up to customers in terms.
Yeah.
So technology.
Well, how do we cover those customers and.
Okay.
At our mouse trap in term of used in the past I think is primarily responsible for.
[laughter].
The outsize growth.
And then our focus on.
Sales excellence is what we focus on to ensure that we.
Can achieve returns even even higher than we're seeing always always strive for.
We are higher than what we're seeing.
Okay.
Okay.
Thanks.
[laughter].
Got it and then another question would just on the.
The M&A environment.
[laughter].
Happy to see the food group acquisition complete.
But seemingly with the regulatory challenges.
Maybe not challenges maybe delay is completing that acquisition I'm just wondering.
Your outlook for future.
Sizable acquisition, maybe the pipeline for that.
Whether or not your leverage level.
Okay.
Currently temper your enthusiasm forward or whether you're aggressively looking for other similar sized or large size.
Okay.
[laughter].
So I am the.
The larger broadline acquisitions, so SJ as we've said before was our top choice and that also filled.
The main white space, we had.
In the northwest.
And to an extent in the.
<unk>.
Yes.
So very pleased and as you said, we're very happy to have that.
[laughter].
The close now and be able to work on the integration.
[laughter].
I think the.
As far as other large broad liners.
Okay.
I'm not sure there would be any of that would be that attractive but.
At least for the near term our focus is about really successfully integrating the food group into our business.
[noise].
And then being very selective on the tuck in M&A.
[laughter].
Where it would be.
More around some of the things around.
Our major produce where it's about filling in.
Space in certain areas that part of the business.
<unk>.
So.
Now that we'd be fully out of the game.
That would be where it would be targeted alongside the successful integration.
<unk>.
Yeah.
Understood.
Thank you.
Uh huh.
[noise].
Hi.
Next question comes from the line.
Kelly.
From BMO capital.
Your line is.
Oh.
Good morning.
Steve.
Correct.
I just had a question.
Sure.
Labor.
Okay.
Okay.
And also any.
Yes.
You guys have.
Over the.
<unk>.
Yes.
Yes.
I know.
Okay, Thanks and.
I presume by by Labor you're talking about.
For the house side of labor, the warehouse and distribution.
[laughter].
Look I think dilutive this alluded to this and it's been it's.
[laughter].
The.
[laughter].
The labor.
Operating.
In fact vastly different perspective.
[laughter].
It's still very much.
You know.
[laughter].
Challenging compared to what we've.
Centers in prior years.
Okay.
If we look at.
Yes.
Rick wage rate increases.
That we've experienced.
Wage rates have gone up a little higher rate this year than last year and last year higher rate than the prior year.
As result of.
[laughter].
The labor tightness that weve.
Yes.
Yes.
[noise].
Having said that our strategy that we've got in place.
It's still the right strategy to continue to make gains in terms of operating expenses.
Yes.
And to mitigate that environment.
When we look at.
Turnover.
Our turnover has has stabilized and.
Adjusting our.
[laughter].
Our wages.
As Paul had an impact on that.
[laughter].
Yeah.
We are.
Also on a better position as result of that as well in terms of staffing and staffing really matters because.
If you fall behind on staffing.
[laughter].
And that impacts in two ways that tries overtime.
Hi, Good choice terminal, Rob so from the staffing perspective, we're probably in the best.
[laughter].
We've been in.
Awhile.
From a technology perspective that you asked about.
[noise].
So the one technology that we presented at our Investor day.
Yeah.
It is.
Right.
Is making good progress we have talked about new technology by which we are.
Our selectors.
Yeah.
Okay.
From the.
[laughter].
That goes to customer.
Yeah.
We've got that deployed about.
Quarter of our Dcs right now.
So we're on track.
Sure.
We'd like to find ways to accelerate that because we're very pleased with the impact to Pat.
Both on reducing the time too.
[laughter].
Onboarding, new selector, which again matters.
Matters, if you have turnover.
And in terms of the.
Level of service for customers in terms of reducing the.
[laughter].
The third thing I would talk about first was.
The second was the technology in first was the environment is.
Yeah.
Our focus on continuous improvement.
We've now rolled that out fully across the company.
And I think that over the long term can have the biggest impact on.
Yes.
Driving local efficiencies and effectiveness in between kind of engagement.
That leads to.
Yes.
Really high retention rates.
Sure.
<unk>.
Okay.
Thanks.
Yes.
Hello.
Sure.
Hello.
<unk>.
I know it's.
Yes.
Talk about any.
Yeah.
You've seen.
<unk>.
Yes.
Yes.
Yeah.
Yeah.
Okay.
<unk>.
<unk>.
<unk>.
Yeah.
<unk>.
So far in that.
Since we closed that we really haven't seen any meaningful change in the.
Yeah.
And the competitive environment, what I'd say more so.
[laughter].
We're focusing on is.
Theres the uncertainty that always comes from an extended period of getting a transaction like this approved and so.
[laughter].
We're pleased with how well.
[laughter].
Food groups case growth and business held up during that extended period in.
Now are very excited to move forward and.
[laughter].
Helping accelerate the growth in that business and also bring some of the.
Tools and product innovation that we have to those marketplaces.
Yes.
And.
No successfully bringing them further further into the.
So it's a business.
Just.
<unk>.
Yes.
Okay.
[noise].
[noise].
Hi.
Next question comes from.
Kelly.
[noise].
Your line is.
<unk>.
Hi, guys. This is actually Stephanie entre thanks for taking my question.
I wanted to ask you first.
Your had a supply chain is there any additional color you could give on.
Archer.
Long you expect it will take time just replacement.
And is there anything that's changed either from like an operational our strategic standpoint.
And that we should know about.
Yeah.
[noise].
So his departure was was disappointing.
Theres really no additional color we can provide.
Okay.
Yeah.
The good news Stephanie.
[laughter].
Yes.
We continue to make.
Yes.
Hi, good progress.
Roadmap that we present.
Yeah.
18 months ago.
Both in terms of.
From the fundamentals that we talked about that in terms of improving our processes.
Routing.
Yeah.
For selecting.
Also in terms.
The.
<unk>.
What we call small T. technology I gave an update on that.
Yes.
<unk>.
Good question in terms of that.
<unk>.
And then lastly, long term trends of automation.
Rationale to.
Small dedicated team to exploring automation something we didn't have in the past.
Yes.
So.
Good.
From a strategy are the ones that we presented.
So very much the roadmap that we are continuing to work.
And in terms of the team to execute that roadmap.
[laughter].
As I talked about Jay is very familiar with the.
Well Matt.
The people because of his role.
Hi supply chain works so.
That combined with the existing team below him that we've actually beefed up.
We feel pretty good.
For however, long, it's going to take too.
Find suitable replacement.
These things typically take.
<unk>.
Fixed in nine months.
Yes.
Yes.
Okay. Thank you and just following up.
[noise].
A question on.
Gross profit.
At dollar growth for stuff is there any.
Thank you can share on how much.
Sta contributed I know you mentioned there.
Our margin from an EBITDA standpoint, but just curious about.
The impact from that gross profit standpoint.
And also any impact from asset or any color on your outlook for inflation.
[laughter].
Okay.
Sure so.
For the for the quarter.
That impacted our.
Gross profit.
Six per case each by about.
Three.
Yes.
So offset so.
<unk>.
Overall, no impact on our leverage.
[laughter].
The thing that I would caution against those with two.
Like that where you end up is I wouldn't take an extrapolate that impact over the longer term.
As I mentioned that.
[laughter].
Because of their lower EBITDA margin.
We would expected to have more of a negative impact on our gross profit per case an opex.
As we.
[noise].
Guide in 2020 will reflect properly that impact as we go.
Into there.
And then over time.
To improve their EBITDA margins as I talked about us.
Yeah.
Integrate them and bring to fruition the synergies that we've talked about.
<unk>.
[laughter].
From a south perspective.
We continue as you would expect us to to monitor that quite closely.
And at this point haven't seen any.
The broad based inflation I know there is some up.
Expectation of some more potential inflation over the next six months or so and.
As we watch side and if that does occur will work closely with.
Our customers and suppliers to effectively manage.
Through.
<unk>.
I think the another important thing is.
[laughter].
We learned a number of things as we.
Worked our way through the avian flu impact.
In past years.
And as a result have positioned us to better deal with anything that may happen from an asset perspective, no things like working with vendors on.
Guaranteed supply agreement.
Yes.
A robust communication process with customers and.
[laughter].
And then also in this case working with our customers to reformulate.
[laughter].
They're recipes and switch the different protein bars to should we see that level of.
[laughter].
Increase and inflation, so as we've talked about in the past.
Yes.
One.
Positive as one of them.
A particular protein like that.
[laughter].
Our customers do you have more flexibility as far as on venue in portion sizes.
[noise].
Yes.
Got it thank you.
[laughter].
[noise].
Next question.
John .
Hey.
<unk>.
From Guggenheim.
<unk>.
<unk>.
<unk>.
And your line.
Okay.
<unk>.
Morning.
<unk>.
Steve.
Okay.
I wanted.
Sean the cadence of synergies you.
Yeah.
Group acquisition.
[laughter].
When we will start to those.
For the model, whether the timing of recognition will be.
Between.
Okay.
And this.
<unk>.
<unk>.
Sure So we'll hubs.
This is dark so you'll begin to see synergy show up in 2020.
And we'll include that in our outlook when we provide guidance.
Since February for the 2020 so.
[noise].
I think that kind of more to come on that I think from.
Oh.
The cadence, yes, so cadence again, we'll talk lots more as time goes on.
A number of.
Okay.
Cox pieces will come a little sooner.
Okay.
Some of the head count because again thats more tied to some of the.
I see conversions in that that we've talked about in the.
[laughter].
I think the other thing is it will happen over multiple years.
[noise].
And as we've talked about in the past so more to come.
On that.
Size, we give our 2020.
Yes.
Great and then maybe.
As a follow.
<unk>.
Fair.
<unk>.
Is there any.
Read through from that account, where you see some.
Other accounts or risk or is that just a one off.
Sure.
<unk>.
[laughter].
So with that one.
Yes, there is.
You're always going to have some wins and losses, we we havent had a loss of the size.
And number of years and I think.
Yeah.
Yes.
There's not anything to read through on that's what we feel still very well positioned whether healthcare and hospitality customer base with.
Yes.
The value that we bring both economic to them, but from the tools in that so.
I still feel very well positioned about our ability to grow with this customer type and.
[laughter].
You do have from time to time something like.
Yes.
<unk>.
<unk>.
Thank you.
Yes.
Next question.
<unk>.
On the line.
From my question.
From where.
<unk>.
<unk>.
Your line is.
<unk>.
Good morning. Thank.
So.
Yeah.
So.
You did mention.
<unk>.
During the.
Oh process.
<unk>.
[laughter].
Client retention.
On the SG.
Right.
I'm just wondering.
No that.
Acquisition.
Yes.
Well listen we're getting.
Yeah.
Yeah.
Negotiation.
Thank you.
Seeing.
[laughter].
Maybe.
Of course.
[laughter].
As a way to avoid.
<unk>.
You.
[noise].
Just.
Option or or.
Are they kind.
[laughter].
Holding steady.
Yeah.
<unk>.
Okay.
Yes.
Sure. So I think actually it'd be more the opposite I think what we see as.
[noise].
Steven using our own.
Factoring.
A few years back.
Okay.
Customers not knowing what's going to happen will tend to either.
Our first five prior to a.
And so now it's too early to really talking about case growth.
Post close but.
We felt the team is very well positioned.
[laughter].
To really accelerate growth in that part of the business.
[laughter].
Though.
Food group had a strong base to begin with.
And can continue to accelerate now from that especially as we.
[noise].
Bring more of our technology and innovative products into the food group markets.
Which will happen here.
Sure.
We're coming up.
Okay.
Okay. Thank.
[noise].
We have a jude.
Your line is.
<unk>.
Yes.
Hi, this is.
Thanks.
My question I know, it's early but she.
Good.
Yes on the initial customer reaction.
Especially as it.
To having.
Yeah.
Private label brands.
LNG.
<unk>.
And also how are your conversations.
Our selling.
Thanks.
What I'd say that it is.
<unk>.
Thank you let him it's very early on so in many cases.
<unk>.
I'll use technology is an example.
Oh.
Other than some of the.
<unk>.
Preparations of carving off the divested locations and.
[noise].
Something like bringing them onto our email and converting their financial calendar to ourselves we've had.
Strong success and those things, we're very pleased with there.
From a customer perspective.
Are they havent seen a whole lot.
So I think that will be more appropriate to presta.
Comment as we go.
[laughter].
But our early on.
[noise].
For those things are more behind the scenes from integration perspective, we're very pleased at how well.
Plateauing.
Yeah.
Yes.
And we do have.
From.
Thanks.
Yes.
[laughter].
[laughter].
Thanks for squeezing the follow up.
Just some too.
Touch on.
Pronto.
If there was anything that you.
Good.
Share with us in terms.
I.
Sales.
Lift you're seeing in the.
Okay.
Without and just how did the margins compare versus.
Yes.
The overall.
[laughter].
Thank.
Yes.
Yeah.
So we're I mean, the best I can do recess to say, we're pleased with the.
But.
Incremental sales.
And the margin associated.
[laughter].
The first markets and that's why we're continuing to two.
And.
[laughter].
The number of markets that are served.
Yeah.
Component, we're pleased from both.
Sales and margin per.
So.
Thank.
Yes.
And no further questions.
I'll be.
Yeah.
Correct.
[laughter].
Thanks.
Thank you so I'd like to thank everyone for the questions.
In summary, we had a good quarter.
<unk>.
We closed on the acquisition of food group, we are pleased.
We're off to a good start.
[noise].
I'd like to close by thanking all of our associates across the company.
[laughter].
Whose hard work and commitment makes these results possible.
Thank you for joining us.
<unk>.
Joining us this morning and have a great.
Yes.
Yes.
Ladies and gentlemen.
Yeah.
Yeah.
Sure.
Thank you all for joining.
Okay.
Okay.